BMI - Indonesia - Freight Transport - 3Q13

Q3 2013
www.businessmonitor.com
INDONESIA
FREIGHT TRANSPORT REPORT
INCLUDES 5-YEAR FORECASTS TO 2017
ISSN 1752-5861
Published by:Business Monitor International
Indonesia Freight Transport
Report Q3 2013
INCLUDES 5-YEAR FORECASTS TO 2017
Part of BMI’s Industry Report & Forecasts Series
Published by: Business Monitor International
Copy deadline: June 2013
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Indonesia Freight Transport Report Q3 2013
CONTENTS
BMI Industry View ............................................................................................................... 7
SWOT .................................................................................................................................. 10
Freight Transport .................................................................................................................................... 10
Political ................................................................................................................................................. 11
Economic ............................................................................................................................................... 13
Business Environment .............................................................................................................................. 15
Industry Forecast .............................................................................................................. 16

Road And Rail ....................................................................................................................................... 18
Table: Rail Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Air ...................................................................................................................................................... 20
Table: Air Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Maritime .............................................................................................................................................. 21
Table: Maritime Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Trade ................................................................................................................................................... 23
Table: Trade Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Table: Key Trade Indicators (US$mn and % change y-o-y) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Table: TOP IMPORT DESTINATIONS, 2004-2011, US$mn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Table: TOP EXPORT DESTINATIONS, 2004-2011, US$mn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Market Overview ............................................................................................................... 26
Industry Trends And Developments ................................................................................ 30

Intermodal ............................................................................................................................................ 30
Rail ..................................................................................................................................................... 31
Air ...................................................................................................................................................... 31
Maritime .............................................................................................................................................. 32
Company Profile ................................................................................................................ 38

Garuda Indonesia (Cargo) ........................................................................................................................ 38
Samudera Shipping Line ........................................................................................................................... 41
Trada Maritime (TRAM) ........................................................................................................................... 43
Regional Overview ............................................................................................................ 46

Political Risk Analysis .............................................................................................................................. 46
Corruption Eroding Yudhoyono, PD's Mandate ........................................................................................... 46
Political Efficacy Concerns Rising ............................................................................................................ 47
Political Outlook ..................................................................................................................................... 50
Table: Table: Indonesia Political Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Global Industry Overview .................................................................................................. 55
© Business Monitor International Page 4

Global Oil Products Price Outlook ............................................................................................................. 55

Methodology ......................................................................................................................................... 55
Crude Price Forecasts ............................................................................................................................ 56
Table: BMI's Oil Price Forecasts, Average Price (US$/bbl) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Early Rally Turns Into Run-Off ................................................................................................................. 56
Table: BMI's Refined Products Forecasts, US$/bbl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Supply: Refining Capacity Expansion Sets Tone ........................................................................................... 61
Naphtha: Global Economic Outlook Weighs On Prices ................................................................................. 65
Gasoline And Gasoil/Diesel: The Green Effect ............................................................................................. 66
Jet Fuel: Freight Continues Slump ............................................................................................................ 67
Table: Total Air Freight & Passenger Volumes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Bunker Fuels: Efficiency Takes Hit On Demand ........................................................................................... 68
Macroeconomic Forecast ................................................................................................ 70

What's Behind The Growth Boom? ............................................................................................................ 71
Commodity Prices: Not The Be All And End All ........................................................................................... 72
Political Stability: Not To Be Taken For Granted ......................................................................................... 73
Reform Agenda: Steady Progress .............................................................................................................. 73
Fiscal And Monetary Policy: Can Crowding Out Be Kept To A Minimum? ........................................................ 74
No Sign Of Credit Excesses Or Corporate Stress .......................................................................................... 75
Uniquely Exposed To Global Risks ............................................................................................................ 77
Below Consensus, But Still Bullish ............................................................................................................ 78
Demographic Forecast ..................................................................................................... 79

Table: Indonesia's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Table: Indonesia's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Table: Indonesia's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Table: Indonesia's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Methodology ...................................................................................................................... 83
Transport Industry ................................................................................................................................. 84
Sources ................................................................................................................................................ 84

BMI Industry View
Still Expecting 6.1% GDP Growth This Year
Our outlook for the Indonesian economy remains unchanged since our last quarterly report. BMI continues
to forecast GDP growth of 6.1% in 2013, rising to 6.4% in 2014. The big driver of this growth is domestic
consumer spending, which represents around 55% of GDP. Coupled with good fundamentals and gradual
improvements in the operating environment as a result of government reforms, this has given Indonesia
significant resilience against external headwinds. One of the main concerns on the latter front has been the
deterioration in the terms of trade over the last year, with the prices of key exports seeing sharp falls: palm
oil prices fell 33.4% since May 2012, and coal prices slumped by 17.2%. On the plus side we think these
commodity prices are now stabilising. Political risk may increase in the run-up to the 2014 general elections
and we remain concerned over the temptation to follow populist economic policies (the current government
plans to ban unprocessed mineral exports in 2014 as a way of ensuring that more value-added refining and
processing remains within the country). Overall however, Indonesia is set to see steady growth which will
offer support to the freight industry. In fact, over the next five years annual GDP growth is set to average
6.4%, confirming the country's status as one of the top performers in Asia.
The growth outlook for Indonesia's freight sector is encouraging, particularly because there are signs that
one of its key problems, an infrastructure investment deficit, is beginning to be tackled. Capacity problems
remain an issue, but new investment projects in ports, airports, road, and rail are being launched.
Industry Data
■ Air freight volumes are forecast to expand by 6.7% in 2013, with average annual growth of 5.2% during
our forecast period to 2017.
■ Rail freight volumes are estimated to rise by 6.2% in 2013, with average growth of 7.1% during our
forecast period.
■ 2013 Tanjung Priok total tonnage forecast to grow 6.2% to 55.193mn tonnes, with average growth of
5.8% expected over our forecast period to 2017.
■ 2013 Palembang total tonnage forecast to grow 5.9% to 12.403mn tonnes, with average growth of 4.5%
over our forecast period.
■ Indonesian foreign trade (exports + imports) expected to grow by 6.4% in real terms in 2013, up from
4.3% in 2012.

Key Industry Trends
KAI To Buy New Rolling Stock In PTBA Deal
PT Kereta Api Indonesia (KAI), the state-owned railway company, is planning to buy new locomotives
and freight cars as part of a deal with coal mining company PT Bukit Asam (PTKA). PTBA is aiming to
sell 22.68 million tons of coal this year. To achieve the target, PTBA in cooperation with KAI says it will
increase railway capacity by purchasing 44 new locomotives and 230 new freight cars, which it hopes to
realize by mid-2013. 'PTBA then will have a total of 88 locomotives and 2,741 cars which will transport
coal to Tarahan Port in Lampung and Kertapati quay in Palembang,' a representative of the coal mining
company said. With the improved capacity of its coal transportation, PTBA will be able to transport 25
million tons of coal per year.
Shipping To Benefit From Rising Automobile Production
BMI believes automobile production in Thailand and Indonesia is entering a boom period, with favourable
knock-on effects for ports and shipping. While Indonesia is the second largest auto market in ASEAN after
Thailand, both in terms of sales and production, it retains plenty of potential as an export hub. Automakers
have increased their investment in the country to take advantage of its low-cost of manufacturing vis-à-vis
other regional neighbours. A potential headwind to additional Indonesian auto sector investment is the slow
expansion of the car terminals in Tanjung Priok port, which is a key channel for Japanese car exports to
emerging markets in SEA, Africa and the Middle East.
Work Begins On North Kalibaru Terminal
In late March, state-owned Indonesian Port Corporation (Pelindo II) began a major expansion project at
Tanjung Priok Port. The first phase of the North Kalibaru Terminal Development Project, valued at US
$2.47bn, is due to accommodate three terminals with a container handling capacity of 13mn twenty-foot
equivalent units. The project will cover an area of 400 hectares and would also eventually accommodate
tank storage/liquid bulk transhipment and other port industries. The first container terminal is due to be
completed by 2014, while the remaining two container terminals and two fuel terminals are expected to be
completed by 2016 and 2017 respectively. While arguing that major port development is vitally needed in
Indonesia, BMI also notes that this project has been delayed by a series of ongoing business environment

issues, including environmental issues, land acquisition issues, permit issues and a lack of coordination
between government agencies, ministries, and sub-sovereign governments.
Key Risks To Outlook
The main downside risk to our ports and shipping sector outlook is the possibility of renewed weakness in
global credit markets, which would force a tightening of interest rates at home. We believe Indonesia is
particularly exposed to such a scenario. Despite responsible fiscal and monetary policies, the authorities
have relatively little room to manoeuvre in the face of tighter global credit conditions: this is because of the
combination of persistent inflationary pressure at home and the weakness of the external accounts due to
lower commodity earnings.
A second downside risk to our outlook is the possibility that some of the current projects to expand port,
road, and rail infrastructure might suffer a high-profile setback, such as a legal dispute or allegations of
corruption. Any such development might damage the gradual improvement in investor perceptions of
Indonesia that has taken place over the last few years. More specifically, it would lead to delays in the
much-needed drive for modernisation.

SWOT
Freight Transport
Indonesia Freight Transport SWOT Analysis
Strengths ■
Large population, location near one of the world's most important maritime trade
routes and plentiful natural resources.
■
Indonesia is the world's single largest liquefied natural gas exporter.
Weaknesses ■
The country's infrastructure is poor by international standards. Investment is needed
to enable it to handle increasing trade volumes.
■
Piracy in the Strait of Malacca continues to be a security risk and a threat to shipping.
■
The country has been exposed to a range of natural disasters, including earthquakes
and tsunamis, which have inflicted damage on transport infrastructure.
Opportunities ■
The development of new coal mines in various parts of the country is boosting
demand for rail freight and creating opportunities for investment in new railway lines.
■
The aviation sector is emerging from a period of crisis and is set to benefit from rising
living standards, with a greater proportion of the population able to afford air travel.
■
Freight transport should benefit from increasing imports owing to growing domestic
consumer demand.
Threats ■
Poor safety standards led to a three-year ban preventing Indonesian airlines from
entering EU airspace.
■
Although this has now been lifted, similar concerns may emerge in other transport
modes, with negative repercussions for the industry.
■
Congestion in key urban centres such as Jakarta and in the country's ports such as
Tanjung Priok can lead to expensive delays and supply bottlenecks.

Political
SWOT Analysis
Strengths ■
Indonesia managed a successful transition to democracy in 2004. In addition, the
2009 parliamentary and presidential elections passed peacefully, signalling the
consolidation of the democratic process. Following 2009, the government showed
further signs of improvement in both efficacy and engagement, but progress has
stagnated since 2012.
■
The military's role in politics has gradually been reduced. The prospects of a military
coup - which seemed a real possibility in the late 1990s and early 2000s - have
diminished substantially. As the military's role in politics continues to wane,
Indonesia's political stability should likewise improve.
Weaknesses ■
Indonesia's domestic political scene is characterised by a proliferation of minority
parties, and formal and informal coalitions are necessary to govern and legislate.
Moreover, the efficiency of state institutions is encumbered by bureaucracy and
corruption. Prospects for reform are beset with numerous challenges, such as the
long-running practice of politicians promising government positions to campaign
supporters.
■
The country was impacted by separatist rebellion and ethnic violence in the late
1990s and early 2000s, which took great efforts to bring to heel. In the event of a new
economic crisis, calls for regional secession could re-emerge.
Opportunities ■
President Susilo Bambang Yudhoyono's Democratic Party had a strong showing in
the 2009 parliamentary elections. Coupled with a strong mandate following his re-
election in the same year, the implementation of policies in the legislature should
become less problematic.
■
Indonesia's status as the world's most populous Muslim country leaves it well
positioned to speak out on global Islamic issues and act as a bridge between the
Middle East and the Asia Pacific region.

SWOT Analysis - Continued
Threats ■
Regional militant group Jemaah Islamiah poses a lingering threat to security in
Indonesia. Jemaah Islamiah is blamed for a series of attacks, including the Bali
bombings of October 2002 and the Jakarta bombings of July 2009.
■
The fact that Indonesia subsidises basic goods means that when the government
raises prices, there is a risk of public unrest, or at least a political backlash.
Additionally, Indonesia's population is extremely young, with more than 50% of
Indonesians younger than 30. Younger populations have historically been a predictor
of political instability.

Economic
SWOT Analysis
Strengths ■
Indonesia's strategic location between the Indian and Pacific Oceans and its
adjacency to major east-west trade routes make it an important economy in the
region. Indonesia is also resource-rich and is the world's largest producer of palm oil.
■
Indonesia has a low cost and large supply of available labour resources. Its labour
force, the fourth largest in the world, is also one of the world's youngest.
Weaknesses ■
Indonesia's economy is not growing fast enough to reduce unemployment, with the
rate still relatively high at 6.2% as of August 2012. Many are forced to work in the
informal sector. Of particular concern is the youth unemployment rate, which is five
times the overall rate.
■
Indonesia's physical infrastructure is considered sub-standard. The archipelagic
nature of the country makes it difficult to weave national infrastructure together.
Despite an ambitious infrastructure revitalisation plan, the country currently compares
unfavourably with its Association of Southeast Asian Nations peers.
Opportunities ■
Indonesia could attract much-needed foreign investment by strengthening its
business environment, particularly through reform of its unreliable legal system.
■
Indonesia stands to benefit from the rise of Islamic financing, having adopted new
legislation in early 2008 designed to tap into this rapidly expanding sphere. With an
overall market share of only 3%, growth prospects for Islamic banking in the world's
largest Muslim country are enormous.
Threats ■
Production at Indonesia's ageing oil fields has been in decline since the mid-1990s.
The country has therefore become a net importer of crude oil in recent years, putting
downward pressure on its current account position. Furthermore, rising oil prices
have begun to pressure Indonesia's current account, where it typically runs a healthy
surplus. The resumption of the Cepu field in late 2009 may help to alleviate
Indonesia's dependence on foreign oil.

SWOT Analysis - Continued
■
Indonesia is perceived as one of Asia's riskier destinations. This leaves the economy
vulnerable to sudden capital outflows at times of risk aversion, which can lead to
sharp swings in the currency.

Business Environment
SWOT Analysis
Strengths ■
Indonesia is South East Asia's largest economy with a nominal GDP of US$880bn and
is the world's fourth most populous country with more than 240mn people. It thus
offers investors a vast home market in which to do business.
■
As a member of the Association of South East Asian Nations' Free Trade Area,
Indonesia is committed to lowering tariff and non-tariff barriers to trade.
Weaknesses ■
Corruption remains a major problem. Indonesia ranked 118th out of 174 countries
surveyed in Transparency International's 2012 Corruption Perceptions Index, where a
low ranking denotes a higher degree of corruption.
■
Indonesia's excessive bureaucracy makes it a difficult place to do business. Among
Asian economies, Indonesia has the longest period to start a business. Labour laws
are also considered excessive.
Opportunities ■
President Susilo Bambang Yudhoyono's administration has gradually been reforming
the business environment, particularly by strengthening the legal system and fighting
corruption. If sustained, this would boost investor interest in Indonesia. However,
reform has been slow, and divisions within the government could curb progress
ahead of 2014 elections.
■
Indonesia has been amending its debt and banking regulations, with the aim of
attracting Islamic financial activities. Over the past five years, Islamic banking growth
has averaged more than 65%.
Threats ■
Recent high-level business disputes between the government and foreign investors
demonstrate that even after investments are up-and-running, there is still scope for
legal problems or obstacles posed by legal wrangling.

Industry Forecast
As a country of roughly 17,508 islands, the connectivity of Indonesia's freight transport network is
logistically difficult to say the least. Indonesia's under-developed transport network remains a major
drawback for the country's freight development, its trade growth and on Indonesia realising its
macroeconomic growth potential. The country is starting to address the deficit in its infrastructure, but BMI
warns the country's freight transport network will struggle to keep pace with our economic growth
projections.
A projected annual growth of 6.4% in Indonesia's real GDP over the medium term (2013-2017) will attract
further attention from the global logistics community, with growth strengthening compared with the
previous five years (2008-2012) annual growth average of 5.9%. This strengthening growth will, however,
put further pressure on Indonesia's freight transport network, which is already struggling to cope and is
plagued by congestion and bottlenecks.
Transport Network Development Struggling To Keep Pace
Indonesia Real GDP Growth % Change y-o-y Average
f= BMI forecast. Source: National Statistics Agency

Driving this growth is demand for Indonesia's raw materials. The country was in 2011 (latest available data)
the world's largest coal exporter, with a coal hungry customer base of China and Japan on the country's
doorstep. The country is also a crude oil exporter, with the country's freight transport sector playing a role in
the liquid and dry bulk shipping sector. Steadily Indonesia is playing a role in the container shipping sector,
as the country develops its manufacturing sector.
Logistics Rank Low

Logistics Performance Index (LPI) Asia Ranks
Source: World Bank
Despite the great attraction of Indonesia for freight transport companies, the major drawback remains the
country's poor logistics network. This problem is highlighted by data from the World Bank's Logistics
Performance Index (LPI). Indonesia is ranked in 58th place out of the 153 countries measured and is placed
second from last when compared with 13 of its regional peers.

Road And Rail
Investment Required Further Up The Supply Chain
Indonesia doesn't publish any data for its road freight sector, but BMI believes that like most of Asia it is
the freight mode that dominates the country's land-based freight mix. The country's road network stretches
for 437,759km, of which 59.1% is paved. In terms of infrastructure quality the World Economic Forum's
Competitiveness Index ranks it 12th out of its 14 regional peers.
Problems Across The Supply Chain

LHC: World Economic Forum Road Comparison (Asia). RHC: World Economic Forum Rail
Comparison (Asia)
Source: Global Economic Forum
The country's rail freight sector is much better developed according to the World Economic Forum's
Competitiveness Index, with Indonesia's rail network ranked ninth out of its 14 peers. The country's railway
network extends for 5,042km and operates on the narrow gauge. Rail is the main freight mode utilised to
cater for Indonesia's coal exports.
Our growth forecast for rail freight is in line with our more general bullish outlook of growth in Indonesia's
freight transport sector. In 2013 we project a strengthening in growth with rail freight volumes forecast to
expand by 6.19% y-o-y to 25mn tonnes, up on the robust growth of 15.6% in 2012. Over the medium term

we project rail freight volumes to grow by 40.6% to reach 33.2mn tonnes in 2017, an annual average
increase of 7%.
Table: Rail Freight
2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Rail freight, '000
tonnes 19,113.00 20,439.00 23,618.00 25,079.95 26,659.99 28,659.49 30,837.61 33,212.11
- % change y-o-y 1.00 6.94 15.55 6.19 6.30 7.50 7.60 7.70
e/f = BMI estimate/forecast. Source: Statistics Indonesia

Air
Playing A Role In The Intra-Asia Story
BMI projects that Indonesia has a major role to play in Asia air freight growth story. Intra-Asia trade is
developing. We have already witnessed the steady expansion of this trend in the box shipping sector and we
believe over the medium term its development will accelerate in the air freight market.
This view offers upside risk to our already bullish air freight forecasts for Indonesia. In 2013 we project the
country's air freight volumes to grow by 6.7% y-o-y to reach 376,700 tonnes, the start of a recovery after
Indonesia air freight volumes declined by 18.9% in 2012. Over the medium term we project air freight
volumes to grow by 28.9%, an annual average increase of 5.2% to reach 455,230 tonnes.
Table: Air Freight
2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Air freight, '000 tonnes 410.49 435.51 353.04 376.70 398.92 418.07 435.63 455.23
- % change y-o-y 3.47 6.09 -18.94 6.70 5.90 4.80 4.20 4.50
e/f = BMI estimate/forecast. Source: Statistics Indonesia

Maritime
Majors Still Enticed Despite Infrastructure Deficit
As highlighted, Indonesia's ports play a major role in the export supply chain of the country's coal and oil.
Increasingly the country is developing its role in the container shipping supply chain, but once again the
country's potential is being held back by the inability of infrastructure development to keep pace with the
country's needs.
The country's ports are ranked low in regional comparison with the Global Economic Forum's
Competitiveness Index ranking them 12th out of their 14 regional peers.
Problems At Port Level

World Economic Forum Maritime Comparison (Asia)
Source: Global Economic Forum
Despite this, major operators are still being enticed by the Indonesia's growth story. Major container
terminal operator ICTSI has cemented its belief in Indonesia's maritime sector by extending its contract to
operate the Makassar Container Terminal, located at Port of Makassar in South Sulawesi by a further 10
years.

This backing by a global port operator back BMI's bullish throughput view for the country's port sector. We
forecast total tonnage at the country's largest port of Tanjung Priok (Jakarta) to grow by 6.2% to 53.2mn
tonnes in 2013, expanding on the 6.3% y-o-y increase recorded in 2012. Over the medium term we forecast
total tonnage volumes at the port to increase by 32.4%, an annual average of 5.8%, to reach 66.3mn tonnes
in 2017. BMI is even more bullish on container throughput at Indonesia's ports, for more information, data,
forecasts and analysis please see BMI's Indonesia Shipping Reports.
Table: Maritime Freight
2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Port of Tanjung Priok
throughput, '000 tonnes 43,689.66 47,119.28 50,087.80 53,193.24 56,172.90 59,427.85 62,853.62 66,331.87
- % change y-o-y 9.65 7.85 6.30 6.20 5.60 5.79 5.76 5.53
Port of Palembang
throughput, '000 tonnes* 9,690.00 10,764.79 11,712.09 12,403.10 12,918.34 13,462.13 14,011.98 14,602.10
- % change y-o-y* 18.75 11.09 8.80 5.90 4.15 4.21 4.08 4.21
*2011 is a BMI estimate. Source: Port Authorities

Trade
Table: Trade Overview
Real 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Imports, real growth, % y-o-y 17.34 13.34 6.65 6.70 9.20 9.00 8.70 8.60
Exports, real growth, % y-o-y 15.27 13.65 2.01 6.10 8.30 8.00 7.20 7.20
Total trade, real growth, % y-o-y 16.31 13.49 4.33 6.40 8.75 8.50 7.95 7.90
Nominal
Imports, US$bn 162.40 210.85 226.92 243.91 282.27 329.90 380.55 438.64
- % change y-o-y 41.18 29.84 7.62 7.49 15.73 16.87 15.36 15.26
Exports, US$bn 173.95 222.80 213.25 227.92 261.60 302.93 344.63 392.11
- % change y-o-y 33.66 28.08 -4.29 6.88 14.78 15.80 13.76 13.78
Total trade, US$bn 336.35 433.65 440.17 471.83 543.87 632.83 725.19 830.75
- % change y-o-y 37.19 28.93 1.50 7.19 15.27 16.36 14.59 14.56
e/f = BMI estimate/forecast. Source: BMI, Statistics Indonesia
Table: Key Trade Indicators (US$mn and % change y-o-y)
Agricultural raw materials 2011e 2012e 2013f 2014f 2015f 2016f 2017f
Agricultural raw materials,
imports, US$mn 4,854.35 5,184.65 5,533.80 6,322.40 7,301.36 8,342.65 9,536.57
- % change y-o-y 23.67 6.80 6.73 14.25 15.48 14.26 14.31
Agricultural raw materials,
exports, US$mn 13,876.03 13,156.63 14,110.47 16,603.60 19,594.74 22,614.77 26,056.10
- % change y-o-y 34.37 -5.18 7.25 17.67 18.01 15.41 15.22
Ores and metals

Ores and metals, exports,
US$mn 20,941.92 19,784.10 21,352.30 25,103.03 29,721.09 34,362.98 39,646.50
- % change y-o-y 35.49 -5.53 7.93 17.57 18.40 15.62 15.38
Ores and metals, imports,
US$mn 11,030.36 12,035.83 13,098.69 15,499.32 18,479.42 21,649.26 25,283.73
- % change y-o-y 60.23 9.12 8.83 18.33 19.23 17.15 16.79
Iron and steel

Iron and steel, exports, US
$mn 2,999.76 2,844.50 3,046.63 3,583.62 4,226.15 4,874.96 5,614.34

Key Trade Indicators (US$mn and % change y-o-y) - Continued
Agricultural raw materials 2011e 2012e 2013f 2014f 2015f 2016f 2017f
- % change y-o-y 70.79 -5.18 7.11 17.63 17.93 15.35 15.17
Iron and steel, imports, US
$mn 11,757.62 11,149.09 11,941.34 14,046.09 16,564.51 19,107.53 22,005.53
- % change y-o-y 70.79 -5.18 7.11 17.63 17.93 15.35 15.17
Manufactured goods
Manufactured goods,
exports, US$mn 70,240.53 67,926.31 71,481.38 79,640.54 89,654.55 99,756.37 111,259.45
- % change y-o-y 20.29 -3.29 5.23 11.41 12.57 11.27 11.53
Manufactured goods,
imports, US$mn 113,897.63 122,266.36 131,112.79 151,093.72 175,897.64 202,280.92 232,531.33
- % change y-o-y 29.26 7.35 7.24 15.24 16.42 15.00 14.95
Fuels
Fuels, exports, US$mn 60,313.81 57,471.92 61,837.59 71,857.10 84,154.40 96,559.52 110,685.40
- % change y-o-y 28.97 -4.71 7.60 16.20 17.11 14.74 14.63
Fuels, imports, US$mn 6,030.20 6,512.79 7,022.93 8,175.16 9,648.63 11,170.05 12,914.48
- % change y-o-y 36.02 8.00 7.83 16.41 18.02 15.77 15.62
e/f = BMI estimate/forecast. Source: UNCTAD
Table: TOP IMPORT DESTINATIONS, 2004-2011, US$mn
2004 2005 2006 2007 2008 2009 2010 2011

China, Mainland, US$mn 4,101 5,843 6,637 8,558 15,249 14,002 20,424 26,212
China, Mainland, US$mn, % of
total 8.81 10.12 10.87 11.49 11.80 14.44 15.05 14.77
Singapore, US$mn 6,083 9,471 10,035 9,840 21,790 15,550 20,241 25,965
Singapore, US$mn, % of total 13.07 16.41 16.43 13.21 16.86 16.04 14.92 14.63
Japan, US$mn 6,082 6,906 5,516 6,527 15,129 9,844 16,966 19,437
Japan, US$mn, % of total 13.07 11.97 9.03 8.76 11.70 10.15 12.50 10.95
Korea, Republic Of, US$mn 1,943 2,869 2,876 3,197 6,926 4,742 7,703 13,000
Korea, Republic Of, US$mn, %
of total 4.18 4.97 4.71 4.29 5.36 4.89 5.68 7.33
United States, US$mn 3,236 3,886 4,066 4,798 7,898 7,094 9,416 10,834
United States, US$mn, % of
total 6.95 6.73 6.66 6.44 6.11 7.32 6.94 6.11
TOTAL 46,528 57,714 61,073 74,484 129,274 96,968 135,691 177,451

TOP IMPORT DESTINATIONS, 2004-2011, US$mn - Continued
% from top 5 trade partners 46.09 50.20 47.70 44.20 51.82 52.83 55.09 53.79
Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with
data used elsewhere in this report
Table: TOP EXPORT DESTINATIONS, 2004-2011, US$mn
2004 2005 2006 2007 2008 2009 2010 2011

Japan, US$mn 15,962 18,049 21,732 23,633 27,744 18,575 25,782 33,715
Japan, US$mn, % of total 22.30 21.07 21.55 20.71 20.25 15.94 16.34 16.57
China, Mainland, US$mn 4,605 6,662 8,344 9,676 11,637 11,499 15,693 22,941
China, Mainland, US$mn, % of
total 6.43 7.78 8.27 8.48 8.49 9.87 9.95 11.27
Singapore, US$mn 6,001 7,837 8,930 10,502 12,862 10,263 13,723 18,444
Singapore, US$mn, % of total 8.38 9.15 8.86 9.20 9.39 8.81 8.70 9.06
United States, US$mn 8,787 9,889 11,259 11,644 13,080 10,889 14,302 16,498
United States, US$mn, % of
total 12.27 11.54 11.17 10.20 9.55 9.35 9.06 8.11
Korea, Republic Of, US$mn 4,830 7,086 7,694 7,583 9,117 8,145 12,575 16,389
Korea, Republic Of, US$mn, %
of total 6.75 8.27 7.63 6.64 6.65 6.99 7.97 8.05
TOTAL 71,588 85,660 100,842 114,112 137,022 116,510 157,791 203,501
% from top 5 trade partners 56.13 57.81 57.47 55.24 54.33 50.96 52.01 53.06
Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with
data used elsewhere in this report

Market Overview
Strong Economy And New Infrastructure Investment Boosts Freight
While a slowly recovering global economy may be a drag on Indonesian growth in 2013, we continue to
like the country as a regional outperformer. Indeed, with sound domestic fundamentals, Indonesia is
showing itself better prepared to weather any headwinds.
Consistent Recovery After 2009
Indonesia Real GDP growth, % change y-o-y
Source: BMI, IMF
Whereas a number of South East Asian economies are bracing for less-than-expected growth in 2013, we
estimate that Indonesia experienced robust growth of 6.2% in 2012, and are forecasting a comparable year
in 2013 with growth of 6.1%. The archipelago is still vulnerable to any faltering in the global recovery,
which would impair its ability to reach its full growth potential, but exposure is limited compared to the rest
of the region. Our core medium-term projection is for growth to average a strong 6.3% in the years running
up to 2017.

Given that Indonesia is largely a domestic demand-driven economy, it has held up relatively well against
the recent global headwinds. Indeed, total exports of goods and services comprise a low 25.2% of GDP.
Still, a fall in external demand hitting Indonesia's export sector could challenge the economy's growth
potential, especially if import demand continues strong.
As we have previously noted, Indonesia is not as exposed to the risk of falling commodity prices as is
widely believed, especially since becoming a net oil importer in 2008. Indeed, manufacturing exports have
risen at approximately the same pace as raw materials exports, and Indonesia still runs a trade surplus when
raw materials have been stripped out. As such, Indonesia remains only slightly vulnerable to a serious
collapse in global commodity prices.
Transport Infrastructure: Improvements Needed
Air transport in Indonesia serves as a critical means of connecting the thousands of islands throughout the
archipelago. Despite recent improvements, safety issues continue to be a cause of some concern. Jakarta's
Soekarno-Hatta International Airport serves as the country's main air transport hub and it is the headquarters
of Garuda, Indonesia's main freight airline. As of early 2011 Indonesia boasted 684 airports, just 171 of
which had paved runways.
Indonesia has a road network of 437,759km, of which 258,744km is paved. The World Economic Forum
ranks Indonesia's road infrastructure 83rd out of 142 countries.
Most railways in Indonesia are on Java, which has two major rail lines that run the length of the island, as
well as several minor lines, with freight services running on all of the lines. Indonesia has a total of
5,042km of railways, all of which are 1.067m narrow gauge (565km are electrified). The World Economic
Forum ranks Indonesia's rail infrastructure as 52nd out of 123 countries. A number of ambitious plans are
underway to expand the freight rail network.
Indonesia's main ports are Tanjung Priok and Palembang. They cater for the country's container, dry and
liquid bulk trade. A US$2.5bn programme has been launched to increase capacity at Tanjung Priok. There is
also a plan to begin work on a new deepwater port on Tanjung Sauh - an island located just south of
Singapore, between Batam and Bintan. The natural deepwater port will require an initial investment of US
$760mn. Indonesia has a merchant marine fleet of 1,244 vessels, including 95 bulk carriers, 57 chemical

tankers and 112 container ships. The World Economic Forum ranks Indonesia's port infrastructure a poor
103rd out of 142 countries.
In The Absence Of Road Data, Rail Dominates
Indonesia Freight Transport Mode Breakdown (% of Total 2011)
Investment And Development Outlook
BMI maintains its long-held view that Indonesia needs to improve the quality of its freight transport
network if it is to capitalise on increasing trade volumes. We are expecting strong throughput growth in the
country's freight transport sector during our forecast period on the back of a healthy mix of private
consumption, net exports and investment, although the current infrastructure deficit presents downside risk
to this.
Reflecting BMI's view that improvements are desperately needed in Indonesia's freight transport network,
the World Bank has said that Indonesia's logistic export expenses are far higher than those of neighbouring
countries, owing to the country's low standard of infrastructure. In its 2012 ranking of countries according
to their 'logistics performance index', the World Bank placed Indonesia in 59th position.

Nevertheless, it seems that there is plenty of investment in the pipeline for Indonesia. According to BMI's
key projects database, there are US$145.84bn worth of transport infrastructure projects ongoing or planned
for Indonesia. Of these, BMI highlights the Tanjung Priok port expansion and the North Kalibaru container
facility as being of particular importance.

Industry Trends And Developments

Intermodal
Vanguard Offers New LCL Consolidation Service
Vanguard Logistics Services is establishing a new less-than-container-load (LCL) consolidation

programme in a bid to expand its services in Indonesia. Under the programme a comprehensive sailing
schedule is accessible from Batam to worldwide destinations with twice weekly departures, the company's
regional managing director Jeff Lee said. The company has also been able to eliminate paperwork with the
provision of seamless connections from Batam through Keppel District Park container freight station
terminal. Meanwhile, the new programme has also enabled the provision of rates from Batam to worldwide
destinations, Lee added.
State Owned Port Operators In Joint Container Handling Initiative
The Indonesian government is believed to be making some inroads to deal with its logistics issues. The
country's four state-owned port operators have entered into a joint venture agreement in a bid to revitalise
the domestic cargo handling business. Each of the operators - Pelindo I, II, III and IV - will own a 25%
stake in the Terminal Petikemas Indonesia joint venture. The venture, which has been designed to offer
container handling and other related services and is connected with the government's Nusantara Pendulum
programme, is likely to help in reducing the price differential between the eastern and western parts of the
sprawling archipelago.
DHL Invests US$50mn In Indonesia
German logistics specialist DHL Supply Chain has unveiled plans for a EUR40mn (US$52.5mn)
investment in its Indonesian operations, describing the market at as a 'key focus', according to the Journal of
Commerce. The company outlined its strategy, which is a response to projected double-digit growth in the
country, at the opening of its new 17,000 sq m facility in Cimanggis, Jakarta. Plans include doubling the
number of road vehicles to 740, and expanding warehousing by 60%.

Rail
KAI To Buy New Rolling Stock In PTBA Deal
PT Kereta Api Indonesia (KAI), the state-owned railway company, is planning to buy new locomotives
and freight cars as part of a deal with coal mining company PT Bukit Asam (PTKA). PTKA had
announced good financial results on the back of selling of 15.3 million tonnes of coal in the last financial
year. PTBA is aiming to sell 22.68 million tonnes of coal this year. To achieve the target, PTBA in
cooperation with KAI says it will increase railway capacity by purchasing 44 new locomotives and 230 new
freight cars, which it hopes to realise by mid-2013. 'PTBA then will have a total of 88 locomotives and
2,741 cars which will transport coal to Tarahan Port in Lampung and Kertapati quay in Palembang,' a
representative of the coal mining company said. With the improved capacity of its coal transportation,
PTBA will be able to transport 25 million tonnes of coal a year.
Air
Garuda Cargo Boosts Service Centre Networks
Garuda Cargo, the subsidiary of national flag carrier Garuda Indonesia, was planning to open 13 more
service centres this year in order to achieve its target of running up to 40 service centres in 2013, one of the
company's senior executives said, as cited by the Jakarta Post. The firm's senior vice president,
Rajendra Kartawiria, said the new centres would be located in the western half of Indonesia and also in
eastern regions, including Papua, Maluku and East Nusa Tenggara (NTT).
'We want to have a cargo service centre in the capital cities of every province in the country because they
are the gateways for cargo to be distributed to smaller and more remote towns,' Rajendra told The Jakarta
Post. The firm launched operations at its 26th and 27th cargo service centres in April. The new centres were
located in Tangerang, Banten, and Yogyakarta. 'This is part of our efforts to move closer to our customers,
as we have seen increasing demand in the cargo sector for the past few years,' he added. According to recent
data from business consultant Frost & Sullivan, Indonesia's logistics sector is expected to grow by 14.5% to
IDR1,634trn (US$168.3bn) this year. Air freight volume will see the highest increase, as it is projected to
rise by 19.6% to reach 1.16mn tonnes from 970,000 tonnes in 2012.
Rajendra said that Garuda Cargo transported some 230,000 tonnes of cargo last year, up by 12% from 2011.
With additional cargo service centres, the company expected to see a 15% rise in the amount of cargo
transported and in revenue achieved by the end of 2013.
He said the company aimed to book US$240mn in revenue this year, up from US$209mn in 2012.
We are optimistic that we can achieve our goals because we are preparing our human resources and

infrastructure for this expansion. In addition, we plan to enter the logistics transportation sector sometime
this year,' Rajendra added. He said the firm was currently exploring opportunities to work with competitive
domestic and global cargo players to make that happen. One or more partnerships with these companies
were planned for the second half of this year, he added.
Garuda Cargo also plans to set up hubs in Medan, North Sumatra, and Makassar, South Sulawesi, in the
future.
Maritime
Royal Haskoning Wins North Kalibaru Consultancy Contract
Dutch engineering and consultancy group Royal Haskoning DHV has been contracted as the lead
consultant for the development of an expansion project of Indonesia's Tanjung Priok Port. The supervision
contract was awarded by Indonesia's state-owned Indonesian Port Corporation (Pelindo II), which is the
sole project developer. The North Kalibaru Terminal Development Project, valued at US$2.47bn, is due to
accommodate a container handling capacity of 13mn twenty-foot equivalent units. The project will cover an
area of 400 hectares and would also eventually accommodate tank storage/liquid bulk transhipment and
other port industries.
Meanwhile, it was reported that Singapore-based international ports operator PSA International is seeking
to participate in a bidding process for the main contract to develop the Kalibaru Container Terminal. The
operator is keen to take part in the proposal in order to become one of Indonesia's port operator partners,
reports Tempo Interactive, citing PSA International CEO Tan Chong Meng. The operator is likely to use the
same technology and management implemented in Singapore and several other countries included in the
PSA International network for the project if it wins the tender, Meng mentioned. The winner of the tender is
due to be disclosed in September, according to the president director of Pelindo II, Richard Joost Lino.
Pelindo II officially started construction of the Kalibaru port in late-March 2013. The Kalibaru port project
certainly highlights the significant growth opportunities in Indonesia's port infrastructure sector; yet it is
also a prime example of the business environment issues that are still plaguing the sector.
The Kalibaru port, also known as New Priok, is located in North Jakarta and will be developed under three
phases. Pelindo II is expected to invest up to IDR22.66trn (US$2.4bn) to complete the first phase, with the
first two phases estimated to cost up to US$4bn. The entire project is due to be completed over the next
decade.

We believe that the Kalibaru port project highlights the significant growth opportunities in Indonesia's port
infrastructure sector. The first phase of the Kalibaru port project will involve the construction of three
container terminals with a total capacity of 4.5mn TEUs and two fuel terminals with a combined processing
capacity of 9.4mn cubic metres. The first container terminal is due to be completed by 2014, while the
remaining two container terminals and two fuel terminals are expected to be completed by 2016 and 2017
respectively.
Meanwhile, the second phase is expected to involve the construction of around four container terminals.
The second phase is expected to start construction in 2018 and be completed in 2022. Once fully completed,
Kalibaru port is projected to have a total capacity of 13mn TEUs, making it the largest port in Indonesia
should these plans be implemented.
Besides Kalibaru port, there are plans to develop the IDR40.3trn (US$4.1bn) Cilamaya port in West
Java, the US$1bn Sorong container port in West Papua by Pelindo II, the US$720mn Gresik integrated
industrial and port hub in East Java by Pelindo III, and the new IDR7.5bn (US$770mn) Makassar port in
South Sulawesi by Pelindo IV. There are also plans to expand existing container terminals. In February
2013, Pelindo III announced that it would invest a total of US$634mn in port infrastructure, with half of the
funds used to expand container terminals at Tanjung Emas Port in Semarang, Central Java, Trisakti Port in
South Kalimantan, and the Teluk Lamong multipurpose terminal project in East Java.
We believe there is significant demand for these port projects, especially as Indonesia's port sector has been
suffering from underinvestment in recent years. A key example is Tanjung Priok port. The port, located in
North Jakarta, is Indonesia's chief seaport and handles 60% of Indonesia's international container traffic.
However, since the ASEAN-China Free Trade Agreement came into effect in January 2010, Tanjung Priok
has been suffering from congestion at times of high demand due to its poor infrastructure. The port was
designed with a maximum capacity of 5mn TEUs, but handled 5.6mn TEUs in 2011 and 6.2mn TEUs in
2012.
This lack of investment has hampered the country's ability to capitalise on its strategic position in growing
intra-Asia trade and driven up logistic export expenses, making the country's exports highly uncompetitive.
The quality of Indonesia's maritime infrastructure was ranked 12th out of 14 of its Asian peers by the World
Economic Forum, while the country's port connectivity was ranked 13th out of 14 Asia countries by
UNCTAD in 2011. With Indonesia's total trade in goods forecast to grow robustly (13.6% per annum
between 2013 and 2017, according to BMI's forecasts), this deficiency in logistical connectivity is expected
to worsen without additional investment in Indonesia's port infrastructure.

BE Problems Still Pertinent
However, we believe that the slow progress for the Kalibaru port project also highlights the ongoing
business environment issues plaguing Indonesia's port infrastructure sector. The environment impact
assessment for the Kalibaru port was originally scheduled to be approved by the government in mid-2012,
but was delayed until January 2013. Looking further back, the Kalibaru project has been plagued by land
acquisition issues, permit issues and a lack of coordination between government agencies, ministries, and
sub-sovereign governments.
Although Indonesia launched a new regulation on land acquisition in August 2012, its impact on speeding
up infrastructure development in the ports sector is still unclear, with several port projects still requiring
government intervention to expedite the land acquisition process. The implementation of the Sorong port
project in West Papua is a case in point, with Pelindo II seeking a presidential decree to accelerate
construction. There is also an ongoing land dispute between Pelindo II and the local residents regarding the
construction of a toll road to the Kalibaru port, with the Jakarta administration planning to act as the
mediator for the dispute.
Therefore, it remains to be seen if Indonesia will be able to implement its port projects (including the
Kalibaru port) according to their scheduled timeframe given the current regulatory backdrop. That said, the
start of construction works at the Kalibaru port represents a major tailwind to our port infrastructure
forecasts. This is reflected in our forecasts, with real growth for Indonesia's port, harbours and waterways
infrastructure industry value expected to reach 14.6% in 2013 and average 6.9% per annum between 2014
and 2017.
Indonesia Set For Car Export Boom
BMI remains bullish on the potential of both Indonesia and Thailand as key strategic auto hubs in South
East Asia. Thailand's pro-business government and strong supplier presence have incentivised automakers
to use the country as a production base and utilise the excellent port infrastructure to export surplus
production to emerging markets such as the Middle East. Indonesia, meanwhile, competes on lower wages
and tax incentives, although its stretched and ageing port infrastructure remains a risk to car exports. The
implementation of the ASEAN Economic Community (AEC) in 2015 will see both these countries attract
further auto-related investment as inter-country tariffs are removed.

The gravitation of global automakers to South East Asia (SEA), together with their dependence on strong
port infrastructure and the shipping industry to export vehicles to markets with end-user demand, throws up
some diverse investment opportunities in the region.
BMI has long held the view that Thailand and Indonesia will remain key strategic auto hubs in SEA. The
onset of the AEC in 2015 makes us bullish on the potential of both these countries, as we believe there
remains plenty of potential to attract further investment in this sector.
Thailand: Pro-Business Government And Strong Port Infrastructure
Thailand's strength as an auto production powerhouse comes from its pro-business government and
excellent port infrastructure. After the country's strong recovery from the devastating 2011 floods,
investment has been pouring in from automakers, resulting in auto production reaching a record of 2.45mn
vehicles in 2012. We expect production to continue growing in 2013.
Furthermore, Thailand's welcoming business environment together with the strong support provided by the
massive presence of auto component suppliers has incentivised Japanese automakers to further increase
their Thai investments recently. Nissan announced in October 2012 that it is building a new factory which
will produce 200,000 completely built-up units (CBUs) a year and Honda announced a THB20bn (US
$670mn) investment in February 2013 to build a new factory as well as expand existing facilities.
While auto exports hit a high of 1mn CBUs in 2012, we expect sustained strong growth in the coming years.
The recent increase in carmaker and supplier investments, together with strong demand for Thai auto
exports in emerging markets, bolsters our bullish view. Going forward, we expect exports to make up a
bigger proportion of domestic auto production, hitting 1.3mn units by 2017.
Thailand's Auto Export Boom Puts Car Carriers In Sweet Spot
Although the global shipping industry is facing a tough business environment due to a glut of tonnage in the
market, car carriers are enjoying a mini-boom in part due to the success of Japanese vehicle exports from
Thailand to markets such as the SEA, Middle East and Latin America.
Nippon Yusen Kaisha (NYK), the world's biggest operator of roll-on roll-off (RoRo) ships (carriers used
to transport vehicles), which has Toyota as its biggest customer, is increasing its car carrier fleet in
anticipation of a record 2013 in Thai vehicle exports. The firm, which has a total of 121 car carriers from its

total ship fleet of 837, ordered four RoRo carriers in October 2012 and wants to increase its car carrier fleet
to 130 by March 2017.
Indonesia: Competitive Wages, Booming Sales And Green Car Incentives
While Indonesia is the second largest auto market in ASEAN after Thailand, both in terms of sales and
production, it retains plenty of potential as an export hub. Automakers have increased their investment in
the country to take advantage of its low-cost of manufacturing vis-à-vis other regional neighbours.
The new low-cost green car (LCGC) law, which is in the process of being enacted, has the potential to
further boost Indonesia's production outlook. Toyota Motor Manufacturing Indonesia (TMMIN) and
Astra Daihatsu Motor (ADM) have unveiled their jointly-produced Toyota Agya and Daihatsu Ayla to
take advantage of the tax incentives under this programme. Given that automakers such as Honda and
Ford are looking to the small car segment to drive their growth in emerging markets, we see the possibility
of them increasing their investments in Indonesia to produce eco-friendly cars in the future.
As automakers begin to ramp-up their eco-cars production to take advantage of the incentives under the
LCGC programme, we forecast 2013 passenger car production to grow 13%, to hit 840,000 units. This then
brings our 2013 vehicle production forecast to 1.2mn units, up 12%.
Another draw for carmakers to set up production facilities in Indonesia is the strong growth potential of the
domestic auto market. Domestic vehicle sales grew 30% in 2012, to a record 1.1mn units and we expect
sales to enjoy an annual average growth of 8.7% over the 2013-2017 period, to hit 1.7mn units by 2017.
Indeed, 2013 is off to a good start, as vehicle sales in January and February combined came in at 199,974
units, up 23% y-o-y.
Port Infrastructure Needs To Improve
A potential headwind to additional Indonesian auto sector investment is the slow expansion of the car
terminals in Tanjung Priok port, which is a key channel for Japanese car exports to emerging markets in
SEA, Africa and the Middle East. With some auto export shipments having to face delays due to the
overstretched capacity of the ageing port, we believe there are significant investment opportunities in
upgrading the country's port infrastructure. One potential risk though is government bureaucracy, which
usually impedes a swift approval process for infrastructure projects. Nonetheless, given that production

decisions by automakers are usually for the long term, we expect demand for additional port capacity for
vehicle exports to remain on an upward trajectory.
While the state-owned port company Pelindo II has finally received government approval to start
construction on Kalibaru Port, which will be an extension of the existing Tanjung Priok port, we expect it to
take at least a couple of years before capacity at the car terminals is expanded.

Company Profile
Garuda Indonesia (Cargo)
SWOT Analysis
Strengths ■
Garuda's dominant position in the air freight market in a densely populated island
archipelago means it is well positioned for demand and revenue growth.
■
New Zealand's Commerce Commission has ended its legal action against Garuda
Indonesia over alleged involvement in fixing prices among air cargo carriers.
Weaknesses ■
Garuda remains unable to increase its service to and from the US significantly
because of Indonesia's poor safety ranking by the Federal Aviation Administration.
■
The EU banned all Indonesian airlines from its airspace on safety grounds in 2007, a
ban which was not lifted until July 2009.
Opportunities ■
The positive consumer outlook for Indonesia bodes well for freighted imports.
Threats ■
Rising fuel prices present a considerable threat to airlines' bottom lines.
Company Overview Cargo Garuda Indonesia (Garuda Cargo), Garuda Indonesia's freight carrying
division, transports goods via both domestic and international flights. Cargo Garuda
Indonesia operates from Jakarta Air Cargo Terminal in Soekarno-Hatta International
Airport using two owned Boeing 747-400F and four leased Boeing 747-200SF aircraft.
The carrier also uses belly space capacity on Garuda Indonesia's passenger aircraft.
Garuda Cargo has a delivery capacity of around 30 tonnes a day.
Garuda Cargo also has a warehouse for storing goods to be shipped and those that
have arrived. The company's core business is to provide a comprehensive range of
integrated cargo transport and logistics services. With its fully integrated and diverse
transport services, it is capable of providing domestic and international customers with
door-to-door or one-stop services. Since 2004, it has been publicly listed on the Hong
Kong Stock Exchange.
State-owned airline Garuda Indonesia flies passengers and cargo to more than 40
destinations, split evenly between domestic and international markets (Asia Pacific and
Europe). Indonesia's national flag carrier commands a more than 50% share of the
domestic market and is expanding its range of international flights. It operates services

to 30 domestic destinations, as well as 24 international ones, largely in Asia. Garuda's

fleet comprises 60 aircraft, including three B747-400s, 43 B737s (300, 400 and 500s),
six A330-300s, three DC10-30s and five F-28s. Despite growing passenger and freight
volumes in 2002 and 2003, Garuda hit serious financial problems, registering losses in
2005 and 2006.
Strategy Given that Indonesia is an ASEAN-5 country, companies based in the country are well
placed to take advantage of increasing trade volumes in the region on the back of the
group's January 2010 free trade agreement (FTA) with China. With intra-Asian trade
volumes rising, BMI expects Garuda Cargo to continue to focus on developing new
routes and services within the region. The airline plans to develop Makassar as its third
domestic hub, after Jakarta and Bali. In line with this strategy, Garuda launched a new
daily service from Singapore to Makassar, which it calls 'the gateway to East Indonesia',
on June 1 2011.
'The launch of this new route will mark a significant step forward in our network
expansion strategy' said Risnandi, senior general manager of the Asia area.
Garuda Indonesia initially planned to operate Boeing 737-500 aircraft on this route. This
is a passenger aircraft, but BMI notes that Garuda Cargo often uses belly-hold capacity
to carry freight.
Financial Data National flag carrier PT Garuda Indonesia was reporting faltering growth in the first
quarter of the year, despite steady growth in passenger numbers, said the Jakarta Post
at the beginning of May.
Garuda booked US$33.7mn in net losses in the first quarter, greater than the US
$10.7mn in losses the airline reported in the same period last year. 'The first quarter is
always the slowest season for Garuda,' Garuda president director Emirsyah Satar said.
'There was also unfriendly weather in January, including flooding, which led to a lower
seat load factor.'
Emirsyah was referring to the severe floods that inundated broad swathes of the capital
in January at the height of the rainy season. The airline's seat load factor dropped to
63.7%in January, almost 14 percentage points lower than the 77.4% rate recorded in
January 2012, which Emirsyah said resulted in an US$18mn loss for Garuda. Emirsyah
said that Garuda's average seat load factor in the first three months of the year was
74.5%, or 1.7 percentage points higher than in the same period last year.
'We are optimistic about the next quarters. We saw a higher seat load factor in February
and March this year compared to similar months last year,' Emirsyah added. Garuda,
69.14% owned by the government, recorded 5.4mn passengers during the January-to-
March period, up 20.7% from 4.56mn in the same period last year. Emirsyah said that
the company would maintain its target for 20% growth in passenger numbers for 2013,
hoping to record 24.5mn passengers by the year-end. More passengers flew with
Garuda during the January-to-March period, pushing the airline's revenues to US

$807.2mn, which was up 12.5% over the US$717.45mn recorded in the first quarter of
last year. Higher flight frequency pushed the airline's operating expenses up 12.7%,
which was primarily attributed to a 16.6% in fuel spending.
Latest Plans To Set Up Garuda Cargo As Separate Company

Developments
Indonesia's national airline Garuda has decided to establish an independent cargo
company, it was reported in March. Earlier, the airline's executives had indicated that its
freight business would be split into a new subsidiary, PT Garuda Indonesia Cargo, in
order to allow superior cooperation with forwarders in domestic and international
markets. However, details of initiative, which was originally planned to be launched in
January, were still not entirely finalised, reported the Journal of Commerce Online, citing
a spokesperson. Meanwhile, Indonesia's air cargo volume is likely to surpass 900,000
tonnes on an annual basis and is expected to rise rapidly. Garuda's cargo business also
recorded a profitable situation in 2012 after registering consistent losses in preceding
years. The airline has lately extended its cargo facilities at Jakarta's Soekarno-Hatta
International Airport as well as run a network of 20 cargo centres across the
archipelago.

Samudera Shipping Line
SWOT Analysis
Strengths ■
Subsidiary of the larger PT Samudera Indonesia.
Weaknesses ■
The company's operations are consolidated in one region.
Opportunities ■
Exposure to the high-growth market of intra-Asia.
■
Potential to increase its role in marine offshore support following changes to
Indonesia's cabotage rules.
Threats ■
Growing competition in the intra-Asia market could see the company's market share
decrease as major box players get more involved.
Company Overview Indonesia's Samudera Shipping Line, which is listed in Singapore, operates in the box,
dry bulk and liquid bulk shipping sectors. The company's container operations are
mainly exposed to the Asian market, with the line offering services between domestic
ports and on intra-Asia routes. The company was founded in 1993.
Strategy Samudera Shipping Line's container operations have developed to offer both domestic
and intra-Asia routes. In Indonesia, the carrier pulls into the ports of Jakarta, Bandung,
Surabaya, Jambi, Semarang, Palembang, Pekan Baru, Panjung, Batam and Belawan.
Samudera Shipping's intra-Asia coverage has expanded to include the ports of
Malaysia, Thailand, Vietnam, Myanmar, the Philippines, Hong Kong, China and Taiwan,
using the Port of Singapore as a hub port. The carrier offers links to ports in the Indian
Ocean, with calls at ports in India, Sri Lanka, Pakistan and Bangladesh. The line has
also expanded out of Asia with services calling at the Middle Eastern ports of the UAE,
Bahrain, Kuwait, Oman, Saudi Arabia, Qatar, Iran and Yemen.
Samudera Shipping's container fleet comprises 31 vessels, with a total of 25,974

twenty-foot equivalent units (TEUs). While the company operates an owned fleet of 16
vessels compared with the 15 that are chartered in, the chartered-in tonnage is made
up of larger vessels, with total charter capacity of 16,382TEUs, compared with the
carrier's owned capacity of 9,592TEUs.

The company does not have any vessels on order, but in 2011 expanded its box fleet
by buying existing vessels. It acquired 1,054TEUs of vessels for US$13.6mn in January,
followed by the purchase of another 1,054 TEUs for US$11mn in March.
Samudera Shipping is also building up its presence in the liquid and dry bulk markets.
The company operates nine chemical tankers, two oil tankers and two gas carriers. The
company's dry bulk fleet is made up of four coal carriers and two recently delivered
Supramax ships. The Sinar Lapuas and Sinar Kutai were both built in South Korea and
came online in Q111. The 57,700 deadweight tonne (DWT) Sinar Kutai was due to carry
potash from the US to Brazil, while the Sinar Lapuas was to operate on a time charter
freighting cargo from China to India.
BMI notes that the carrier's marine offshore support fleet provides Samudera Shipping
with exposure to Indonesia's oil production sector.
Recent Chief Executive Resigns

Developments
According to Sea Ship News the board of Samudera Shipping Line announced in mid-
May the resignation of Torkis David Parlaungan Batubara as ceo with effect from 22
May. The 44-year-old had been in the job since June 2010. Samudera slipped into the
red in the first quarter this year with a net loss of US$4.42mn. With 37 ships and nearly
30,000 slots Samudera ranks as the 39th largest liner in the world, according to
Alphaliner statistics.
Financial Data 2013
Indonesia-based Samudera Shipping is expecting difficulties in operating on intra-Asia

routes, mainly as a result of low freight rates due to an oversupply of vessels. However,
the expansion in Indonesian economy is expected to continue increasing demand for
regional container shipping. The company registered a net loss of US$4.42mn in Q113,
compared with a loss of US$3.86mn a year earlier. Revenue slipped 12.8% year-on-
year in Q113, to US$96.32mn.
Earlier, Samudera said it wants to grow its container shipping operations in its home
country as Asian regional markets continue to struggle, reported Hellenic Shipping
News. The company said that an oversupply of vessels would mean that freight rates
for the regional box-shipping sector were likely to remain strained in 2013. However, the
company is hopeful that the growing Indonesian economy would boost the country's
container shipping segment. Samudera will look to capitalise on this by expanding its
fleet and also exploring the inclusion of profitable routes.

Trada Maritime (TRAM)

SWOT Analysis
Strengths ■
The company has dry bulk and tanker operations, providing a diverse range of
services.
Weaknesses ■
TRAM is seeking to expand its fleet at a time when both dry and liquid bulk sectors
are seeing rates drop owing to overcapacity.
Opportunities ■
The Indonesian government issued a shipping law in 2008 that included a cabotage
principle requiring all vessels operating in Indonesian waters to be domestically
owned.
■
Owing to the country's ASEAN-5 membership, Indonesian companies are well placed
to take advantage of increasing trade volumes in the wake of ASEAN's free trade
agreement with China.
Threats ■
Rates for shipping both dry bulk and liquid bulk have plummeted owing to the supply/
demand imbalance.
■
Rising fuel prices pose a threat to shipping lines' profit margins.
Company Overview Trada Maritime (TRAM) is an Indonesia-based offshore services provider. The
company is engaged in the provision of port, marine terminal, logistics and related
services to the oil, gas, mining and energy industries. The company is also engaged in
the provision of integrated floating storage and offloading (FSO) services, as well as
liquid cargo and dry bulk transport services. The company's direct subsidiaries, which
are engaged in shipping and marine transport, include PT Hanochem Tiaka Samudera,
PT Trada Tug and Barge, PT Hanochem Shipping, Hanochem Labuan Samudera, PT
Trada Offshore Services, PT Trada Dry Ship and PT Trada Shipping.
Strategy BMI expects TRAM to take full advantage of Indonesia's new cabotage rules that
require all vessels operating in Indonesian waters to be domestically owned. The rule,
which came into force on January 1 2011, opened great growth opportunities for
domestic shipping companies such as TRAM. TRAM's financial director, Adrian E
Sjamsul, said the ruling created the potential for domestic vessels to ship all export

commodities, particularly coal: 'Indonesia exports around 250mn tonnes of coal every
year, and if Indonesian vessels ship at least 25% of the amount, domestic shipping
companies will grow better.'
TRAM is looking to expand its fleet to enable it to cope with the potential increase in
volumes. The company is spending US$120mn to support its business expansion in
2011. BMI notes that TRAM is taking a risk by investing heavily in fleet expansion at a
time when overcapacity is driving freight rates down. However, given that Indonesia's
new cabotage rules guarantee the company a considerable amount of cargo, it should
be protected somewhat from volatile spot rates.
Sjamsul told reporters at a conference in May 2011 that US$90mn would be raised from
loans and the other US$30mn from the company's internal budget: 'TRAM will use the
funds to buy six or seven new vessels this year and to support the maintenance and
modification of the existing vessels.' He added that the company had already
accomplished part of the business expansion. In January 2011, for example, the
company bought a Panamax-sized vessel worth US$30mn to strengthen its dry bulk
fleet. It also purchased a 64,239 deadweight tonne (DWT) tanker in April worth US$8mn.
The tanker is to be converted into an FSO vessel.
TRAM has ordered the construction of an accommodation barge to serve PT Berau

Coal Energy, a coal mining company, and is planning to buy three or four Handymax-
sized (typically 52,000-58,000DWT) to Panamax-sized vessels that would be used as
bulk carriers. Sjamsul added that TRAM, which currently operates 44 vessels including
38 of its own, would also expand its services to the international market in 2011.
Recent Trada Invests In Coal Freight Business

Developments
PT Trada Maritime (TRAM) said it would spend US$200mn to expand its fleet to support
its coal transhipment business, the Jakarta Post reported in December. Trada plans to
use US dollars raised from bank loans to buy between 30 and 50 sets of tugs and
barges over the next five years, Trada president director Danny Sihanouk de Mita said
at a press conference. The firm would receive around 10 tug-and-barge sets a year,
with the first three sets scheduled for delivery in early 2013. Trada provides floating
storage and off-loading (FSO) services and liquid and dry bulk transportation services. It
currently operates 33 tug-and-barge units, FSO ships and liquefied natural gas (LNG)
carriers that are used to carry crude oil, refined oil, LNG and coal. The company entered
the coal transhipment business in 2008 and has since transported coal to destinations
that have included Australia, China, Japan and the US. The new tug-and-barge units
were needed to support the firm's coal business, as Trada was in the process of sealing
a $750 million, 10-year deal with Zakia Limited, a United Arab Emirates-based firm, in
2013, according to de Mita. 'This partnership is something we have been working on for
some time. We are planning to first sign a memorandum of understanding with Zakia in

January. Hopefully the contract will follow and be realized in March', de Mita said.
Financial Data 2012
Trada's total revenues grew 5.6% to IDR431.36bn (US$44.53mn) between January and
September 2012, the company said. The growth was attributed to income from its LNG
business, which was launched in March. However, Trada's net profits plunged 57.9% to
IDR33.09bn, as the firm suffered recorded foreign exchange losses and higher interest
costs.

Regional Overview
Political Risk Analysis
BMI View: Yet another high profile corruption case has rocked President Yudhoyono's Democratic Party
(PD), with PD Chairman Anas Urbaningrum being forced to step down following bribery allegations. As
such, Yudhoyono's anti-corruption profile has sustained yet another heavy blow, and the PD 's prospects
ahead of 2014's elections continue to shrink. Meanwhile, reports of a schism within the PD threaten to
further undermine the government's legislative efficacy over the short-term, with the possibility of a
nationalistic sea change in the run-up to 2014 elections looming progressively larger.
Corruption revelations surrounding Democratic Party (PD) Chairman Anas Urbaningrum have shaken
President Susilo Bambang Yudhoyono's party to the core, further undermining the public's confidence in his
administration and the government at large. In late February, Anas was accused by the powerful Corruption
Eradication Commission (or KPK) of accepting bribes related to the construction of an IDR1.2trn sports
complex, and he has since stepped down from his post. Although Anas denies the charges, his implication
by the KPK bodes extremely poorly for his chances at exoneration, as the anti-corruption body boasts a
perfect conviction record against those that it has formally charged (formal charges are expected within a
few months' time).
Corruption Eroding Yudhoyono, PD's Mandate
Given his former position as party chairman, Anas' downfall will have wide-reaching implications for the
Democratic Party as a whole, with president Yudhoyono's reputation (and, indeed, his overall political
standing) likely to suffer as a result. Although Yudhoyono is widely considered to be clean, the Anas
accusations represent yet another high-level corruption case within the president's already ailing party. In
2012, former Democratic Party Treasurer Muhammad Nazaruddin was convicted on charges that he
embezzled IDR4.6bn in relation to the construction of the Southeast Asia Games athletes' village in
Sumatra. The Nazaruddin fiasco has been particularly damning for the Democratic Party given his
implication of a vast array of party officials, as well as his accusation that he had embezzled the funds in
order to shore up the party's own ailing finances.
While Yudhoyono himself has not been directly implicated in any of the corruption scandals, the
widespread nature of the evidence against a number of the party's top officials has engendered doubts about
the president's leadership abilities, as well as his ability to follow through with his pledge to stamp out
corruption. At the same time, rumours that Yudhoyono has potentially lost control of his party to supporters
of Anas have begun to gain traction, with speculation rife over why the president has failed to call for the

extraordinary party congress that is necessary to elect a new party chairman. According to some senior
officials, Yudhoyono may be concerned that Anas' supporters have the numbers to vote in a candidate
against his will, thereby substantially undermining his power as the de factor leader of the party.
Yudhoyono is currently serving his second term, meaning that he cannot stand for election again in 2014.
The Democratic Party has yet to name a suitable candidate, and it appears progressively less likely that it
will be able to nominate a strong enough contender to challenge current front-runners Prabowo Subianto
(Gerindra Party) and Megawati Sukarnoputri (Indonesian Democratic Party of Struggle, or PDI-P). In a late
February presidential poll, Subianto surprised with a strong 35% showing, with Megawati coming in at a
distant second with 20% of the proposed vote. Likewise, the Democratic Party polled extremely poorly (8%
of the most popular party vote) against Gerindra (26%) and PDI-P (25%).
Political Efficacy Concerns Rising
The waning influence of president Yudhoyono, and indeed the Democratic Party as a whole, raises the
prospect that the current government is becoming something of a lame duck administration ahead of 2014.
As we wrote previously (see: Fiscal Outlook Deteriorates On Subsidy Incoherence', June 7 2012), the
Democratic Party was basically outmaneuvered in its failed attempt to decrease burdensome fuel subsidies
earlier in the year, and the government's efficacy has appeared to fade away since the controversial impasse.
The rapidly ballooning (and highly inefficient) subsidies are among the most important and pressing issue
facing both the government and the economy, yet the government has been ineffectual in addressing the
issue and is unlikely to do so before 2014 elections unless oil prices advance substantially.

Negative Trajectory
Asia - BMI Short-Term Political Risk & Policy-Making Ratings
Source: BMI
Taken in combination with the populist (bordering on nationalistic) tone assumed by the most popular
presidential candidates, the government's growing inability to legislate is a concerning notion in terms of
both the country's political outlook and its business environment. With the tone ahead of 2014's elections
already a decidedly populist one, the political environment is increasingly vulnerable to a nationalistic sea
change as candidates position themselves to take advantage of the overt trend. As a result, we have
downgraded Indonesia's short-term political risk rating to 72.5 from 74.2 previously (in light of
deteriorating policy enactment and formation processes), and we emphasize that the overall trajectory of the
country's political environment remains negative at this point in time.

A Widening Chasm
Asia - Indonesia & Philippines 5 Year Credit Default Swap, bps
Source: BMI
With regards to Indonesian sovereign risk, we also note that Indonesian credit protection remains
inexpensive in our view, and that the country's unattractive political risk environment relative to the
Philippines leads us to believe that the spread between Indonesian and Philippine 5 Year Credit Default
Swaps (CDS) will continue to widen.

Political Outlook
Long-Term Political Outlook
Outlook Improved, But Uncertainty Lingers
BMI View: Although Indonesia has returned to relative orderliness since the chaos of the late 1990s and
early 2000s, the country faces multiple challenges and threats to its stability that could flare up again if
President Susilo Bambang Yudhoyono or his successor proves incompetent or if improved governance fails
to take hold. As such, investors will continue to view Indonesia as one of Asia's riskier destinations.
Indonesia has held two rounds of peaceful parliamentary and presidential elections, in 2004 and 2009,
suggesting that democracy is finally taking root after a highly uncertain period following the fall of
President Suharto in May 1998. Suharto seized power from Indonesia's first president, Sukarno, in 1966 and
ruled through a military-dominated authoritarian regime whose political vehicle was the still-influential
Golkar party. The immediate post-Suharto period was highly unstable, given that his departure was
triggered by economic meltdown. Indonesia subsequently saw the presidency change three times in as many
years, and the country was almost torn asunder by separatist rebellions and religious violence, which were
only quelled in the early 2000s. Given this recent history, it is still too early to say that Indonesia has taken a
decisive turn for the better.
Threats And Challenges To Stability
Poverty And Unemployment: Indonesia's per capita GDP exceeds US$3,000, but it remains a poor
country with an increasingly uneven income distribution. Indonesia's Gini coefficient (which measures
income inequality) rose to 0.41 in 2011, from 0.311 in 1999, indicating a wider wealth gap. In addition,
while official unemployment was 6.2% in August 2012, this masks a high degree of underemployment;
part-time workers make up 70% of the total number of employed Indonesians. Meanwhile, urbanisation is
proceeding rapidly, with the urban population expected to increase from 54% in 2010 to 63% by 2020,
according to UN forecasts. Many new urban migrants will end up eking a basic living in Indonesia's
increasingly crowded cities.
These adverse socio-economic conditions mean that inflation - particularly of food and fuel prices - is a
particularly sensitive issue. Indonesia has become a net oil importer in recent years, and increases in
domestic fuel prices were a major source of discontent against Suharto and his successors. However, more

recent increases in fuel prices by the Yudhoyono administration in 2005-08 have met more subdued
resistance.
Young Population: Although Indonesia's total fertility rate - the average number of children a woman will
have in her lifetime - has fallen to an estimated 2.2, just above replacement level (2.1), the country's
population is very young as a whole. Around 44% of the population is younger than 25. This means that
there is a substantial pool of young people that, if left unemployed or underemployed, could drift into
criminal groups, radical political movements or even Islamist terrorist networks.
High Degree Of Ethnic Diversity: Indonesia remains a highly diverse nation, ethnically and in religious
terms. The dominant group, the Javanese, make up 40.6% of the population, with the next-largest groups,
the Sundanese and Madurese, comprising 15% and 3.3% respectively. Eighty-six percent of the population
describe themselves as Muslims, and almost 10% are Christians (Protestants and Catholics). At the time of
Suharto's downfall, violence erupted against Indonesia's ethnic Chinese, who controlled a disproportionate
segment of the economy. Suharto's exit was followed by intense clashes between Muslims and Christians in
Lombok, the Moluccas islands and Sulawesi, while separatists groups stepped up agitation or insurgencies
in Aceh, Riau, Papua and East Timor. Of these, only East Timor achieved independence, in 1999. Separatist
violence was quashed in the early 2000s, but it is far from clear whether this represents a lull or a definitive
acceptance of inclusion in Indonesia.
Islamist Terrorism: Indonesia has experienced many incidents of terrorism over the past decade, of which
the worst was the Bali bomb attack in October 2002 that killed 202 people. More recently, two luxury hotels
were attacked in Jakarta in July 2009. Although radical Islamist parties have failed to make significant gains
and Indonesia generally remains tolerant, a small number of dedicated terrorists can cause disproportionate
damage to the country's reputation. In the early 2000s, Indonesia's rumour mill suggested that rogue
elements of the powerful military were secretly backing Islamist militants to destabilise the country in order
to pave the way for a return to military rule, but this is impossible to verify.
Immature Political System: The political party system is still dominated by personalities rather than
issues, although this is slowly changing. In recent years, the secular-nationalist parties have been far
stronger than Islamist-oriented parties. However, there have been some concerns that religious freedom is
under threat as the government has accommodated Islamist intolerance on some social issues. Although
elections are now largely peaceful events, they are usually accompanied by at least some accusations of
irregularities or vote-buying. Overall, Indonesia remains one of the most corrupt countries in the world, and
corruption scandals from time to time take a toll on senior figures and undermine faith in institutions.

Indonesia scores a relatively poor 59.0 out of 100 in our long-term political risk ratings, dragged down by
poor scores in the 'characteristics of polity' (54.2) and 'characteristics of society' (52.5) components. Indeed,
with a relatively high poverty incidence, a widening income gap, tensions among a diverse ethnic
population and high levels of corruption, the country still has formidable challenges to overcome.
Nonetheless, the political outlook has become considerably brighter with the re-election of President Susilo
Bambang Yudhoyono for a second term in July 2009, and this is reflected in the high score of 70.0 in the
'policy continuity' component of our ratings.
Scenarios For Political Change
A key question is whether the stability enjoyed under Yudhoyono represents a normalisation of political
processes or a peaceful lull until centrifugal forces once again take hold. Yudhoyono, a former general with
secular-nationalist and economic reform leanings, is widely considered the country's most capable leader.
However, he must step down in 2014 after two terms, and it is far from clear who will succeed him, let
alone what their policies would be.
Best-Case Scenario - Democratic Consolidation: Under this scenario, democracy is consolidated by

another peaceful election in 2014 that transfers power to Yudhoyono's successor, who shares his reformist
vision. Indonesia remains broadly stable, which in turn leads to greater foreign investment and faster
economic growth. Separatism fails to revive, while any terror attacks, if they occur, are on a small scale
with minimal political or economic impact. Indonesia then evolves politically along the lines of South
Korea, becoming a stable democracy. We see at least a modest chance that Indonesia will follow this path.
Intermediate Scenario - Muddling Through: In this scenario, democracy is consolidated, but governance
remains poor and beset by corruption, while parliament is dominated by anti-reform and pro-vested interests
elites. Although terrorism and separatism are contained, occasional deadly incidents frighten investors,
adding further reasons not to invest. In order to quell such disturbances, the military's power increases, in
turn leading to civil-military tensions. The economy continues to grow at a modest pace but remains a
regional laggard. Under these circumstances, Indonesia would increasingly resemble the Philippines. We
see a modest likelihood of this scenario playing out, especially if Yudhoyono disappoints in his final term
(2009-2014) and if his successor proves incompetent.
Worst-Case Scenario - Renewed Fragmentation: In this scenario, Yudhoyono fails to reform institutions
and squanders his opportunities, leading to a populist succeeding him in 2014 with the backing of an
unwieldy and fragmented coalition. Indonesia then slides back into instability, which deters investment.

Islamist terrorists re-emerge, while resource-rich separatist movements make a renewed push for
independence on the grounds that they would be economically better off on their own. With the central
government weak and divided, Jakarta starts to lose control of outlying regions, and the military goes on a
new offensive to bring them to heel. A new military coup then becomes a distinct possibility, as the armed
forces' importance rises. Indonesia increasingly comes to resemble Pakistan as a country on the brink of
failure. Overall, we view this scenario as unlikely, but one that cannot be precluded.
Table: Table: Indonesia Political Overview
System of Government Presidential democracy, universal suffrage: 560-seat parliament (five-year term).
Executive power rests with the president (maximum of two five-year terms).
Head of State and President Susilo Bambang Yudhoyono (Democratic Party), since October 20 2004
Government
Last Election Parliamentary - April 9 2009
Presidential - July 8 2009
Composition Of Current Multi-party coalition

Government
Vice President - Boediono, Finance & Economics - Agus Martowardojo, Defence - Purnomo
Yusgiantoro, Foreign Affairs - R. Mohammad Marty Muliana Natalegawa, Central Bank
Key Figures Governor - Darmin Nasution, Armed Forces Chief - Agus Suhartono, Army Chief - Agustadi
Sasongko.
Main Political Parties (%
votes received in April 2009 Democratic Party (PD): Secular-nationalist. Founded 2001. Party of President Yudhoyono.
Led by Anas Urbaningrum. (20.85%)
election)
Golkar: Conservative-nationalist, secular, centre-right. Founded in 1964 and served as
ruling party during the Suharto era (1966-98). Led by Aburizal Bakrie. (14.45%)
Partai Demokrasi Indonesia Perjuangan (PDI-P) (Indonesian Democratic Party - Struggle):
Secular-nationalist. Led by Megawati Sukarnoputri. (14.03%)
Prosperous Justice Party (PKS): Islamist party, advocates greater role of Islam in public life.
Founded in 1998. Led by Lutfi Hasan Ishaq. (7.88%)
National Mandate Party (PAN): Moderate Islamist party. (6.01%)
United Development Party (PPP): Islamic party. Led by Suryadharma Ali. (5.32%)
National Awakening Party (PKB): Conservative, secular. Founded in 1998 by former

president Abdurrahman Wahid. Led by Muhaimin Iskandar. (4.94%)
Next Election Parliamentary - April 2014
Presidential - July 2014
Indonesia has a number of minor territorial disputes with its neighbours. In addition, it has
experienced inter-communal and separatist violence in recent years, in Aceh, Kalimantan,
Ongoing Disputes Moluccas, Sulawesi, Lombok and Irian Jaya. These disputes have largely been brought
under control.
Indonesia is a founding member of the Association of Southeast Asian Nations (ASEAN),
Key Relations/ Treaties Asia-Pacific Economic Co-operation (APEC), and the Non-Aligned Movement. It is also a
member of the Organisation of the Islamic Conference.
BMI Short-Term Political 73.5
Risk Rating

Table: Indonesia Political Overview - Continued
Presidential democracy, universal suffrage: 560-seat parliament (five-year term).

System of Government Executive power rests with the president (maximum of two five-year terms).
BMI Structural Political Risk 59.0
Rating
Enter table source

Global Industry Overview

Global Oil Products Price Outlook
BMI View: Prices of most oil products held steady in the first quarter of 2013, thanks to a rally in crude
prices in January and February. However, the rest of the year could see prices fall back as early gains in
crude prices start to roll back amidst revived concerns about global economic growth as problems in the
eurozone return to the limelight and optimism about US economic growth winds down. Downward pressure
on fuel prices will likely persist as competition in the global refining sector heats up, and as the
emergence of alternative fuels challenges the stronghold of oil-based fuels in the transport
sector. Notwithstanding the downtrend in fuel prices, crude prices in the US$90 - US$100 per barrel range
will continue to support oil products prices at historically high levels.
Methodology
Our refined products forecasts methodology is based on estimating the future spreads between each product
- gasoline, gasoil/diesel, naphtha, jet fuel/kerosene, bunker fuel 180 and 380 - and its regional benchmark:
WTI for products sold at New York, Brent for Rotterdam and Dubai for Singapore. In other words, changes
in crude prices (and our crude price forecasts) will automatically trigger movements in our forecasts for oil
product prices.
Our estimates of the spread between crude prices and individual oil products are determined by the
following:
■ Supply: This will be affected by changes in regional and global refining capacity.
■ Demand: This is partly a function of our expectations of the trajectory of the global economy. With
regard to customers, we have identified the four main markets using the products they each utilise most
often: kerosene/jet fuel in the aviation sector, gasoline and diesel for retail users and land freight
operators, naphtha in the petrochemicals industry (a gauge for industrial activity) and bunker fuel for the
shipping sector. In our outlook for demand we therefore incorporate forecasts and the views of BMI's
Shipping, Freight Transport, Autos and Petrochemicals industry analysis, as well as the assumptions and
forecasts from BMI's Country Risk analysts, in an effort to incorporate a wide-range of industry data.

Crude Price Forecasts
In early March we revised our forecast for Brent and WTI for 2013. We now expect Brent to average US
$110 per barrel (bbl) and WTI US$93.50/bbl. Our forecast for Dubai, which takes into account the
estimated spread between Dubai and Brent as part of its methodology, is US$107/bbl (see BMI's Oil Price
Outlook - Forecasts Revised On Early Rally, But Fundamentals To Take Prices Lower , 1 March 2013).
Table: BMI's Oil Price Forecasts, Average Price (US$/bbl)
2011 2012 2013f 2014f 2015f 2016f 2017f
Brent 111.05 111.68 110.00 105.00 102.50 101.00 99.00

WTI 95.05 94.15 93.50 91.00 91.00 92.00 93.00
Dubai 106.15 108.88 107.00 103.00 100.00 98.00 95.50
f = forecast. Source: BMI, Bloomberg
Early Rally Turns Into Run-Off
2013 opened with a strong rally in prices of all oil products we consider in our forecasts. This is both a
function of gains in crude prices (by February 19, Brent and WTI had risen 5.3% and 3.8% since the start of
the year) and bullish economic growth sentiments that translated into higher expectations for oil product
demand. However, renewed economic fears in the eurozone, as well as sombre economic data from the US
and China, have seen this rally unwind for both crude oil and oil products.

Crude Rally Loses Steam…

Front Month Price Of Brent & WTI, August 2012-Present (US$/bbl)
Source: Bloomberg

… And Oil Products Follow Suit
Prices Of Selected Oil Products In Rotterdam, New York & Singapore
Source: Bloomberg

We expect oil products prices to even out over the year as economic concerns are likely to linger. Barring
any supply shocks to the market caused by the eruption of tensions in the Middle East and in the Korean
peninsula, or major refinery outages, fuel demand should remain relatively subdued in 2013. We highlight
emerging markets such as China, India, Brazil and Indonesia as significant growth markets, but the effect of
this growth will likely be tempered by weak consumption in the developed countries - a product of a slower
global economy and increased fuel efficiency. Hence, our short-term forecast for 2013 - which we have
revised this quarter - shows a year-on-year (y-o-y) decrease in prices across all products.
In the longer term, we expect prices to stay at levels above those in 2010 through to the end of our forecast
period in 2017 as a result of high crude prices. Nonetheless, across all products, the uptrend in prices since
2009 appears to have reversed into a downtrend from 2012. This change is particularly pronounced in the
bunker fuels market, for both 180 and 380 fuel grades.
In addition to a slight fall in crude prices that underpins our fuel price forecast, we also expect crack spreads
to narrow due to the following long-term developments: an increase in global refining capacity,
whose impact would be especially strong in the Asian market; increased fuel efficiency; and the beginning
of a switch to alternative fuels.
Although this fall in prices will occur globally, regional discrepancies do exist. As such, broad
generalisations should be taken with caution.

Table: BMI's Refined Products Forecasts, US$/bbl
2011 2012 2013f 2014f 2015f 2016f 2017f

Jet Fuel
Rotterdam 127.91 130.12 127.87 122.33 119.31 117.31 114.82
New York 128.24 130.74 128.69 121.19 119.19 118.19 115.19
Singapore 125.67 127.01 126.04 120.71 116.47 114.14 111.16
Global Average 127.27 129.29 127.54 121.41 118.33 116.55 113.72
Gasoil/Diesel
Rotterdam 125.80 128.64 126.09 120.29 117.02 114.80 112.11
New York 124.72 128.24 127.74 120.24 118.24 115.24 112.24
Singapore 126.26 128.08 126.55 122.00 118.00 115.00 112.50
Global Average 125.59 128.32 126.79 120.84 117.75 115.01 112.28
Gasoline
Rotterdam 114.47 120.77 118.44 112.88 109.86 107.87 105.42
New York 119.30 124.79 122.78 115.28 113.28 112.28 111.28
Singapore 119.91 123.41 121.53 116.08 111.77 108.59 105.57
Global Average 117.89 122.99 120.92 114.75 111.64 109.58 107.42
Naphtha
Rotterdam 106.07 106.75 105.15 101.61 101.50 100.10 98.19
Singapore 102.46 102.96 101.68 100.34 97.00 95.30 93.07
Global Average 104.26 104.86 103.42 100.97 99.25 97.70 95.63
Bunker Fuel 180
Rotterdam 97.27 101.52 94.73 91.26 90.13 89.87 88.98
New York 101.09 104.65 100.31 92.81 90.81 89.81 88.81
Singapore 100.14 101.96 97.32 92.84 90.86 89.77 88.09
Global Average 99.50 102.71 97.46 92.30 90.60 89.82 88.63
Bunker Fuel 380
Rotterdam 94.03 97.47 92.13 88.56 85.83 83.87 81.48
New York 97.13 100.29 97.00 89.50 87.50 86.50 85.50
Singapore 98.94 101.08 96.22 91.74 89.96 88.87 87.19
Global Average 96.70 99.61 95.12 89.93 87.76 86.41 84.72
Bunker Fuel Average
Rotterdam 95.65 99.50 93.43 89.91 87.98 86.87 85.23
New York 99.11 102.47 98.65 91.15 89.15 88.15 87.15
Singapore 99.54 101.52 96.77 92.29 90.41 89.32 87.64

BMI's Refined Products Forecasts, US$/bbl - Continued
2011 2012 2013f 2014f 2015f 2016f 2017f

Global Average 98.10 101.16 96.29 91.12 89.18 88.11 86.68
f = forecast. Source: BMI, Bloomberg
Consumers will be grateful for falling diesel and gasoline prices over the coming years. Falling prices may
delay the rise of alternative fuels, however, including some early movement towards liquefied natural
gas (LNG) and biofuels in transportation, which we have seen in the shipping and air freight industries. This
could in turn taper the downward trend in fuel prices.
Supply: Refining Capacity Expansion Sets Tone
An expected increase in global refining capacity should help contain dramatic increases in oil prices.
According to our forecasts, based on refinery changes in our downstream database, refining capacity is
expected to rise approximately 10% between 2012 and 2017 - which is 1% higher than the growth we
project for global oil consumption over the same period. Nonetheless, this expansion alone is insufficient to
account for the fall in fuel prices that we expect to see.

Expansion Meeting Growth Needs
Global Refining Capacity And Oil Consumption, 2010-2017 ('000b/d)
e/f = estimate/forecast. Source: EIA, BMI
The geography of expansion is highly uneven. Emerging markets in Asia, the Middle East and Africa are
building up their capacity. However, developed economies such as Japan and Europe will see more refinery
closures, which will in turn negate some of the loosening of the global fuels market that the former should
have brought about.
Emerging Markets
Africa will see the fastest rate of regional refining capacity growth at 30%. However, the most significant
growth in absolute volume will come from the Middle East - where Saudi Aramco has at least three large
300,000 barrels per day (b/d) refineries set to come online - and in Asia - where expansions continue apace
in China and India, while Indonesia considers at least four large newbuild refinery projects. Meanwhile,
Russia's refinery modernisation programme will see its plants continue to serve the market to make up for
expected closures in Central Europe. Turkey - the fastest-growing market for oil in Europe - will also see
significant refinery expansion.

Supporting Domestic Needs With Internal Expansion

Refining Capacity Of Emerging Markets, 2010-2017 ('000b/d)
Selected CEE = Russia, Azerbaijan, Turkey; f = forecast. Source: EIA, BMI
This means that most of these markets are prepared to meet an expected increase in local fuel demand and
will have spare capacity for export. This is particularly so for the Middle East and Russia. Even China,
which is set to overtake the US as the world's largest oil consumer, is on its way to becoming a net fuel
exporter owing to a continued increase in its domestic refining capacity. This will loosen some pressure on
global supplies and in turn prices, particularly in the Singapore market.
Developed Markets
Among developed markets, the outlook is brightest for US refiners which are amply supplied by cheaper
crude feedstock available in the North American markets, thanks to a production boom in the US and
Canada. However, due to fragmentation of the US refined fuels market, where supplies are concentrated in
the refining heartlands of the Midwest and Gulf Coast, prices in import-dependent New York (East Coast)
are expected to remain elevated and follow international trends. This will create an uneven market with
prices that can vary vastly from region to region, to reflect differences in the crude baskets refiners have
access to.

Lower runs and refinery closures in developed markets outside of the US will be the main factor propping
up prices despite capacity expansion in emerging markets. At a time of high crude feedstock prices, crude
import-dependent refiners in developed Europe and Japan will see their refining margins pressed. Weaker
domestic demand (the cause of which will be further elaborated) also makes them dependent on external
markets for support. However, their export competitiveness will be challenged by the smaller scale of their
plants relative to newbuild and sophisticated facilities in emerging markets, and cheaper fuel exports
coming out from the US Gulf Coast.
Struggling Against The New Challengers
Refining Capacity In Western Europe & Japan, 2010-2017 ('000b/d)
f = forecast. Source: EIA, BMI
This is already taking shape. For instance, Platts reports that Japanese refiners will most likely lower their
runs in view of weak refining margins. At least three Japanese refineries - Sakaide, Tokuyama and Muroran
- will end processing operations in 2014 on the back of a weak domestic market and legislation forcing the
rationalisation and modernisation of refining operations. A Bloomberg survey underscores similar woes
facing European refiners, showing that executives interviewed expect at least 10 plants in the region to
permanently shut down by 2020.

Losses in capacity in these traditional refining markets will limit the scale of global refining expansion, such
that the global fuel markets will not be oversupplied and significantly force prices down. Slower demand
growth - owing to an expected rise in fuel efficiency, tougher environmental rules, rollback of fuel subsidies
and alternatives to oil products - explains the extent to which individual oil product prices will fall.
Naphtha: Global Economic Outlook Weighs On Prices
Weak growth in some of the world's most industrialised economies will affect demand and its effect seems
to be particularly pronounced for naphtha. Although the rally between January and February 2013 saw
naphtha prices pick up 10.7% on average in Rotterdam and Singapore, the fall in oil products prices across
the board thereafter saw naphtha fell 16.9% from its mid-February peak at the time of writing - the greatest
decline observed among all oil product grades and above the 12.4% decrease in the price of Brent over the
same period.
As the fall in oil product prices has been precipitated by renewed growth fears, particularly in the eurozone,
it suggests that naphtha - a feedstock for the petrochemicals industry - is especially sensitive to
macroeconomics.
With the exception of the US, we expect tepid growth in key industrialised countries - growth in the
eurozone and Japan is projected to average 1.2% and 1.1% respectively between 2013 and 2017. China's
growth is also expected to slow down from an average of 9.2% between 2008 and 2012 to 6.4% between
2013 and 2017. This will keep prices of naphtha subdued.
We forecast an average price of US$103.42/bbl for naphtha in 2013 - a 1% fall from 2012 when economic
prospects were equally bleak. Over the longer term the fall in crude prices, alongside slow growth in key
countries, will see naphtha fall by an average of 1.76% between 2013 and 2017. An exacerbation of the
eurozone crisis or economic shocks elsewhere poses downside risk to this forecast.

Gasoline And Gasoil/Diesel: The Green Effect
Gasoline and gasoil/diesel - key for the land transport sector - will also be affected by a weak global
economic outlook. Complicating demand for gasoline and gasoil/diesel are green measures; fuel-efficient
vehicles and green legislation limiting emissions will further limit growth in consumption of these fuels in
developed countries. Oil-based fuels could also see a growing challenge from alternative power sources
such as batteries or natural gas - LNG and compressed natural gas (CNG) - as the preferred choice in the
transport sector towards the tail-end of our forecast period, both in emerging and developed markets.
For example, Indonesia, the Philippines and Pakistan are pushing their countries towards CNG for
transportation, while China has already started a pilot programme to run public buses and taxis on LNG in
selected cities. A rollback of fuel subsidies or price controls on fuel - which China has attempted and many
emerging countries could enforce under budgetary pressures - would also slow demand growth significantly
in these markets.
Meanwhile, in the US, major freight player UPS is deploying more gas-powered trucks in its fleet. Other
major transport companies could follow suit, given the low price of domestic gas in the US and under a
small but growing shift towards green policies. Meanwhile, Volkswagen's Scirocco R-Cup - a car race that
will pit cars powered by CNG against each other - could also indicate a growing embrace of gas-powered
cars at the household level. The challenge posed by gas to oil-based fuels will likely grow, especially if
supported by a further fall in gas prices globally.
Our average global gasoline price for 2013 is US$120.92/bbl, compared to an average of US$122.99/bbl in
2012. Over the longer term, we see an average fall of about 2% per annum between 2013 and 2017. The fall
is expected to be greatest in Rotterdam, where the fall in gasoline demand is expected to be greatest,
followed by Singapore as competition among refiners heats up alongside an expansion of refining capacity
in the region.

Jet Fuel: Freight Continues Slump
We forecast that jet fuel prices will fall steadily through to 2017, in line with our other fuel products
forecasts. Between 2013 and 2017, prices are forecast to fall 12% in Singapore, 10.0% in Rotterdam and
10.0% in New York.
In terms of freight transport, we forecast European, North American and Asian air freight carriers will
continue to be squeezed in 2013, by both the challenging global economic picture and the continued growth
of Middle Eastern carriers and their new hubs in the Gulf, having knock-on effects on jet fuel demand.
Indeed, the industry's torrid run continues into 2013 with year-to-date (ytd) figures from IATA to the end of
February showing a global decline in freight tonne-km (FTK) of 1.2%. The only bright spot remains the
Middle East, which posted positive growth amid an otherwise negative sector.
The IATA did, however, continue to record an increase in passenger demand going into 2013. At the time
of writing, passenger traffic for February 2013 (the most recent data available) saw 3.6% y-o-y growth.
Nonetheless, it warned that a decrease in consumer confidence owing to macroeconomic developments will
affect this upward trend. Moreover, even at these higher levels load factors were at 77.1%, implying that
spare capacity remains. Hence, it will take a significantly large increase in passenger traffic to translate into
more flights and jet fuel demand. Thus we see little upside risk of this uplifting the weaker demand we see
in the air freight segment and to our short-term jet fuel price forecast.
Table: Total Air Freight & Passenger Volumes
Feb 2013 vs. Feb 2012 YTD 2013 vs. YTD 2012
RPK FTK RPK FTK
(% change y-o-y) (% change y-o-y) (% chg y-o-y) (% chg y-o-y)
International 3.6 -6.9 3.6 -1.2
Domestic 3.9 -2.3 2.4 1.2
Total Market 3.7 -6.2 3.1 -0.8
RPK: Revenue-Passenger-Kilometres; FTK: Freight-Tonne-Kilometres. Source: IATA

Bunker Fuels: Efficiency Takes Hit On Demand
Our global average forecast for bunker fuel (the average of the 180 and 380 grades global price) stands at
US$96.29/bbl in 2013, which is down 4.8% from the 2012 average of US$101.16 - the highest average
price recorded over the last three years.
Of all the oil products, the downtrend in bunker fuel prices looks the most pronounced. 2012 saw a strong
downward trend in bunker fuel prices, reversing a strong price rally that had taken off in 2009.
End Of The Uptrend

Price Of Bunker Fuel 380 (Top Chart) & Bunker Fuel 180 (Bottom Chart), 2008-Present (US$/Metric
Tonne)
Source: Bloomberg, EIA

We have been highlighting two key risks to the global shipping industry, each of which will have a knock-
on effect on bunker fuels demand. The first is that there is a high risk of global overcapacity, as new ships,
and especially container ships, hit the market. In 2013, this issue will be especially true with new mega-
vessel capacity, including Maersk Line's Triple E-Type 18,000 twenty-foot equivalent unit (TEU) vessel,
the largest ship to date, coming online. Importantly, these ships are not just larger, but they are actually
more fuel-efficient than those currently employed around the globe. Not only will they be able to carry
more goods, but they will be able to do so with less fuel, therefore reducing bunker fuels demand.
These efficiency trends are also part of a broader push for an overall cleaner shipping industry, as demanded
by both governments with forward-leaning environmental policies and major ports themselves. Hong Kong
and Los Angeles - two of the largest ports in the world - are demanding that container ships utilise cleaner
bunker fuels than today's standards.
Furthermore, we have previously highlighted a separate push to increase the utilisation of LNG as a
shipping fuel, with several European ports investing in LNG shipping infrastructure to support this new
industry. Det Norske Veritas (DNV), a ship classification bureau, estimates that 19-45% of ships will be
powered using LNG by 2030. Meanwhile, Maersk Line wants to test biofuels and NYK Line is trialling a
solar power-assisted car carrier. We believe that the most likely alternative to bunker fuel will ultimately be
LNG. However, this remains a long-term prospect that will only kick in towards the end of our forecast
period.
Our forecast for a decline in bunker fuel costs will offer shipping companies some short-term relief and take
the pressure off their bottom lines in the coming years, although prices will remain elevated by historical
standards. As such, we believe that companies will continue to slow steam in an effort to conserve fuel and
cut expenditures, as well as embrace the push towards cleaner-burning fuels. All of this is to say that the
overall trend for bunker fuels will be that of reduced demand over the medium term.

Macroeconomic Forecast
BMI View: Indonesia's growth boom is built on solid foundations and we expect it to continue over the
coming years. That said, risks are growing, the most pressing of which is a deterioration in global credit
markets that could force up local borrowing costs. We forecast real GDP growth of 6.1% this year, versus
an estimated 6.2% in 2012 and consensus expectations of 6.3% growth.
Indonesia's economic growth boom since the Asian Financial Crisis has been impressive, with real GDP
growth averaging 5.4% per annum since the recovery began in 2000. Corporate profits (as measured by the
companies on the Jakarta Composite Index) have grown by an average annual rate of 22% over this period,
even accounting for the 60% peak-to-trough decline seen in the global financial crisis. This has allowed
Indonesia's GDP (in US dollar terms) to rise faster than any other country in the region (with the exception
of Myanmar) over this period.
Remarkable Growth Performance
Nominal GDP Growth In US Dollar Terms, %
Source: BMI, National Statistics Institutes

We expect 2013 to be another good year for Indonesian growth, but caution that a disruption in global credit
markets poses a large risk to the Indonesian economy, particularly given the recent collapse in the current
account. We forecast real GDP growth of 6.1% this year, versus an estimated 6.2% in 2012 and consensus
expectations of 6.3% growth. We believe that 6%+ can be maintained over the coming years,
notwithstanding the growing risks.
What's Behind The Growth Boom?
With commodity-related exports accounting for over 60% of total exports, Indonesia has certainly
benefitted from the commodities boom over recent years. However, this by no means entirely explains the
country's improving economic fortunes in recent years. Relative political stability, an improving regulatory
environment, sound monetary and fiscal policy (and thus a lack of distortionary bubbles), and supportive
global credit markets have all played their part. This combination of supportive factors has unlocked private
sector profit potential, resulting in a doubling of private capital spending over the past decade in real terms.
Nicely Balanced
Indonesia - Trade Balance Breakdown, IDRmn
Source: BMI, BI

Unlike the growth that we have seen in China over the past decade (the third best performer in terms of
GDP growth in US dollar terms), we believe that Indonesia's growth is sustainable. We see few signs of
major malinvestment threatening Indonesia's long term growth outlook, and expect relative financial
stability to reign. Below we outline Indonesia's growth drivers and identify key risks that could derail
this growth.
Commodity Prices: Not The Be All And End All
Indonesia has undoubtedly benefitted from the commodities boom, with commodity-related exports
increasing 30% faster than non-commodity exports since 2005. The weakness in export prices seen in 2012
was a clear blow to the economy, with total exports falling 6% over the full year, exposing the current and
fiscal accounts and leading to a weakening of the rupiah. Commodity imports still make up a relatively low
share of total imports (at just 30%), so a declining commodity import bill in 2012 offered little respite.
While continued declines in commodity export prices pose a risk to Indonesia's growth story, this risk is not
critical. The economy held up strongly in 2012, in spite of this external shock, and we believe that this
could be the case going forward. Furthermore, looking at Indonesia's terms of trade chart, we could see
some sort of mean reversion over the coming years following several years of deterioration.

A Terms Of Trade Bear Market

Indonesia - Citigroup Terms Of Trade Index
Source: BMI, Citigroup
Political Stability: Not To Be Taken For Granted
A return of political instability is perhaps the largest threat to Indonesia's medium-term economic outlook.
President Yudhoyono's Democratic Party (PD)'s prospects ahead of 2014's elections continue to shrink
owing to successive corruption scandals, and the potential for a more populist regime to rise in prominence
is growing. Specifically, a large risk comes from a continuation in the resource nationalism that we have
seen over the past 12 months (see 'Trade Policy Casts Shadow Over Commodities Sectors', January 22).
Should this continue, it could undermine opportunities not only in the commodities space but also deter
foreign investors from entering other areas of the economy.
Reform Agenda: Steady Progress
Indonesia's business environment has improved markedly over recent years, albeit from a very low base.
The central and local governments have cut red tape and eased the costs associated with business activity by
making regulatory practices more efficient. According to the World Bank's Doing Business Report 2012
Indonesia, represented by Jakarta, is among the top 50 economies improving the most to close their gap
with the top performers globally, and among the top five within the East Asia and the Pacific region.

To cite a few examples, business start-up times have been cut dramatically over the past five years, as has
the time dealing with construction permits. Tax rates have been reduced, and, just as importantly, online
systems for filing taxes have cut the time it takes to pay taxes by more than half. The recently-passed land
acquisition bill is another step in the right direction. The Heritage Foundation's Index of Economic Freedom
corroborated the broad improvement seen in Indonesia's business environment. The country's score has
risen steadily since the GFC, increasing from 53 in 2009 to 57 today, helping the country close the gap with
the world's freest economies.
While there is a risk posed by a new national government, we do not expect to see the trend of regulatory
pragmatism be reversed anytime soon, with local officials increasingly aware of the positive impact that
these reforms have had on local tax revenues and economic growth.
Fiscal And Monetary Policy: Can Crowding Out Be Kept To A Minimum?
Tax reforms to widen the government's revenue base have been instrumental in boosting revenues over
recent years and allowing the government to lower its debt level. Natural resource-related revenues have
also grown strongly thanks to the commodity boom, but their share of total revenues have halved over the
last year, reflecting the structural improvement seen in the tax take. On the revenue side, despite the
continued lack of willingness to push through fuel price reforms, total expenditures as a share of GDP have
averaged a respectable 18% over the past five years, and debt-to-GDP has continued its retreat. Indonesia's
fiscal accounts are in pretty good shape, and this will continue to facilitate private investment over the
coming years by keeping crowding out to a minimum.

Reasonable Real Rates

Indonesia, China - Real Interest Rates
*Real interest rates calculated as: average of (Bank Base Rate minus CPI) & (Nominal GDP minus 1-Year Lending
Rate). Source: BMI, IFS
Prudent monetary policy has also had a large part to play in keeping government bond yields low. Interest
rates have generally been above Bank Indonesia's base rate over the past decade and the lending rate has
generally exceeded nominal GDP growth. With the exception of late-2011 when we believe that BI was too
aggressive with its rate cutting policy, they have generally acted prudently. While M2 growth has been a
little high over recent years, total credit as a share of GDP had grown only marginally, and is not showing
any warning signs as of yet. With property bubbles springing up in a number of countries across the region,
we take comfort in the lack of speculative activity going on in the country's real estate market compared
with its regional peers.
No Sign Of Credit Excesses Or Corporate Stress
We believe that prudent monetary and fiscal policy has prevented the build-up of excesses and speculative
bubbles that have characterised China's growth story over recent years. While we do not dispute that there
are certain excesses in some areas of the economy, on the whole, there are few signs that the capital
spending of recent years has been driven by flawed price signals and prone to widespread losses. On the

contrary, the corporate sector is in rude health. This contrasts greatly with the situation we see in China at
present, where a huge credit bubble appears to be in its final stages and evidence of corporate stress is
already clearly showing.
Leading The Pack

Average Return On Assets For Listed Stocks, %
Source: BMI, Bloomberg
Using corporate data from stocks listed on the Jakarta Composite Index, return on assets is showing no sign
of easing. The 12% figure is among the highest in the region, almost triple that seen in China. Going beyond
this, Indonesian corporates appear to be showing high quality earnings. By this we mean that companies are
boasting strong cash flows, with operating cash flows exceeding net income by a strong margin. Again this
contrasts with China (as represented by the Shanghai Composite Index), where cash flows have lagged
earnings potentially reflecting a rise in receivables and accounting gimmicks inflating earnings.

Quality Earnings
Indonesia, China - Average Operating Cash Flows/Earnings For Listed Stocks
Source: BMI, Bloomberg
Uniquely Exposed To Global Risks
Looking at the composition of GDP by expenditure, it appears as though Indonesia is relatively insulated
from external forces, with private consumption representing the lion's share of GDP at 55%. However, the
economy is highly exposed to global credit conditions. This became abundantly clear in 2009 when the
Indonesian rupiah collapsed and local bond yields soared. Since then, the external debt position has
strengthened and we are not expecting a perfect storm in global capital markets. That said, Indonesia is once
again at risk from a freeze up in global debt markets. The local bond market is increasingly at the mercy of
external demand, with foreigners holding 33% of total bonds. Regarding external debt, the global reach for
yield has pushed the 5-year CDS spread to near record lows of 130 basis points. This has come at a time
when Indonesia's current account deficit is hitting all-time highs, suggesting that any flare-up in global risk
aversion could send local interest rates soaring and the currency plunging, both to the detriment of domestic
demand.

Below Consensus, But Still Bullish
Growth should continue to perform strongly in comparison with regional peers in 2013. Business
confidence is on the up according to a number of surveys, with the recent CPA Australia-Pacific small
business survey showing Indonesian firms as being by far the most optimistic in the region. Likewise,
consumer confidence is also booming according to official sources. Our infrastructure team holds a bright
outlook for the construction sector thanks in part to continued progress on the public-private partnership
front. We also expect to see a broad-based recovery in exports as the regional growth rebound continues
until H213.
Confidence Is Up
Indonesia - Business & Consumer Confidence Indices
Source: BMI, Statistik Indonesia
That said, we remain concerned by the unique threat posed by renewed weakness in global credit markets,
which could once again undermine the country's growth prospects in the near term. As such, the balance of
risks favours being below consensus in our 2013 real GDP growth forecast, and we are forecasting 6.1%
growth versus Bloomberg estimates of 6.3%.

Demographic Forecast
Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is
the total population of a country a key variable in consumer demand, but an understanding of the
demographic profile is key to understanding issues ranging from future population trends to productivity
growth and government spending requirements.
The accompanying charts detail Indonesia's population pyramid for 2011, the change in the structure of the
population between 2011 and 2050 and the total population between 1990 and 2050, as well as life
expectancy. The tables show key data points from these charts, in addition to important metrics including
the dependency ratio and the urban/rural split.
Source: BMI, World Bank, UN

Table: Indonesia's Population By Age Group, 1990-2020 ('000)
1990 1995 2000 2005 2010 2012e 2015f 2020f
Total 184,346 199,400 213,395 227,303 239,871 244,769 251,880 262,569

0-4 years 22,625 22,182 21,526 22,272 21,579 21,017 20,740 19,722
5-9 years 22,818 22,273 21,904 21,296 22,077 22,095 21,416 20,596
10-14 years 21,767 22,678 22,151 21,790 21,197 21,464 21,987 21,333
15-19 years 20,294 21,517 22,483 21,948 21,599 21,320 21,061 21,856
20-24 years 18,354 19,902 21,166 22,079 21,552 21,453 21,331 20,808
25-29 years 15,902 17,975 19,494 20,686 21,589 21,529 21,171 20,979
30-34 years 13,384 15,563 17,603 19,067 20,255 20,748 21,194 20,820
35-39 years 10,341 13,063 15,228 17,233 18,699 19,217 19,916 20,887
40-44 years 8,046 10,037 12,730 14,864 16,860 17,517 18,365 19,606
45-49 years 7,450 7,739 9,690 12,317 14,422 15,260 16,451 17,976
50-54 years 6,711 7,067 7,363 9,242 11,789 12,679 13,916 15,947
55-59 years 5,498 6,229 6,584 6,878 8,667 9,648 11,182 13,290
60-64 years 4,225 4,938 5,624 5,971 6,266 6,800 8,010 10,442
65-69 years 2,911 3,607 4,249 4,871 5,206 5,257 5,571 7,225
70-74 years 1,958 2,288 2,866 3,409 3,944 4,112 4,339 4,742
75+ years 2,064 2,342 2,734 3,382 4,168 4,653 5,230 6,340
f = BMI forecast. Source: BMI, World Bank, UN

Table: Indonesia's Population By Age Group, 1990-2020 (% of total)
1990 1995 2000 2005 2010 2012e 2015f 2020f
0-4 years 12.27 11.12 10.09 9.80 9.00 8.59 8.23 7.51
5-9 years 12.38 11.17 10.26 9.37 9.20 9.03 8.50 7.84
10-14 years 11.81 11.37 10.38 9.59 8.84 8.77 8.73 8.12
15-19 years 11.01 10.79 10.54 9.66 9.00 8.71 8.36 8.32
20-24 years 9.96 9.98 9.92 9.71 8.98 8.76 8.47 7.92
25-29 years 8.63 9.01 9.14 9.10 9.00 8.80 8.40 7.99
30-34 years 7.26 7.80 8.25 8.39 8.44 8.48 8.41 7.93
35-39 years 5.61 6.55 7.14 7.58 7.80 7.85 7.91 7.95
40-44 years 4.36 5.03 5.97 6.54 7.03 7.16 7.29 7.47
45-49 years 4.04 3.88 4.54 5.42 6.01 6.23 6.53 6.85
50-54 years 3.64 3.54 3.45 4.07 4.91 5.18 5.52 6.07
55-59 years 2.98 3.12 3.09 3.03 3.61 3.94 4.44 5.06
60-64 years 2.29 2.48 2.64 2.63 2.61 2.78 3.18 3.98
65-69 years 1.58 1.81 1.99 2.14 2.17 2.15 2.21 2.75
70-74 years 1.06 1.15 1.34 1.50 1.64 1.68 1.72 1.81
75+ years 1.12 1.17 1.28 1.49 1.74 1.90 2.08 2.41
f = BMI forecast. Source: BMI, World Bank, UN

Table: Indonesia's Key Population Ratios, 1990-2020
1990 1995 2000 2005 2010 2012e 2015f 2020f
Dependent ratio, % of total

working age 1 67.3 60.8 54.7 51.2 48.3 47.3 45.9 43.8
Dependent population, total, '000
2 74,142 75,371 75,430 77,020 78,172 78,598 79,283 79,957
Active population, % of total 3 59.8 62.2 64.7 66.1 67.4 67.9 68.5 69.5
Active population, total, '000 4 110,204 124,029 137,966 150,283 161,699 166,171 172,597 182,612
Youth population, % of total
working age 5 61.0 54.1 47.5 43.5 40.1 38.9 37.2 33.8
Youth population, total, '000 6 67,210 67,133 65,581 65,358 64,853 64,576 64,143 61,651
Pensionable population, % of
total working age 7 6.3 6.6 7.1 7.8 8.2 8.4 8.8 10.0
Pensionable population, '000 8 6,932 8,238 9,849 11,662 13,318 14,022 15,141 18,306
f = BMI forecast; 1 0>15 plus 65+, as % of total working age population; 2 0>15 plus 65+; 3 15-64, as % of total
population; 4 15-64; 5 0>15, % of total working age population; 6 0>15; 7 65+, % of total working age population; 8 65+.
Source: BMI, World Bank, UN
Table: Indonesia's Rural And Urban Population, 1990-2020
1990 1995 2000 2005 2010 2012e 2015f 2020f

Urban
population,
% of total 30.6 35.6 42 48.1 53.5 55.5 58.4 62.5
Rural
population,
% of total 69.4 64.4 58 51.9 46.5 44.5 41.6 37.5
Urban
population,
'000 54,279.90 68,174.50 86,217.70 105,440.20 128,450.90 135,773.40 146,972.20 164,105.90
Rural
population,
'000 123,105.30 123,326.90 119,062.60 113,770.10 111,420.10 108,995.70 104,908.20 98,463.50
f = BMI forecast. Sources: BMI, World Bank, UN

Methodology
BMI's industry forecasts are generated using the best-practice techniques of time-series modelling. The
precise form of time-series model we use varies from industry to industry, in each case being determined, as
per standard practice, by the prevailing features of the industry data being examined. For example, data for
some industries may be particularly prone to seasonality, i.e. seasonal trends. In other industries, there may
be pronounced non-linearity, whereby large recessions, for example, may occur more frequently than
cyclical booms.
Our approach varies from industry to industry. Common to our analysis of every industry, is the use of
vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable's
own history as explanatory information. For example, when forecasting oil prices, we can include
information about oil consumption, supply and capacity.
When forecasting for some of our industry sub-component variables, however, using a variable's own
history is often the most desirable method of analysis. Such single-variable analysis is called univariate
modelling. We use the most common and versatile form of univariate models: the autoregressive moving
average model (ARMA).
In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality
is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for
analysis and forecasting.
It must be remembered that human intervention plays a necessary and desirable part of all our industry
forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks,
anomalous data, turning points and seasonal features where a purely mechanical forecasting process would
not.

Transport Industry
There are a number of principal criteria that drive our forecasts for each transport variable:
GDP Growth
As transport activity is heavily influenced by real GDP growth, this factor is examined to ascertain its
relationship with overall trade volumes. Projected GDP growth is calculated using BMI's own
macroeconomic and demographic forecasts.
Real Trade Volumes
The sum of imports and exports plays a particularly important role in developing countries with a small
domestic industrial sector. In particular, the focus is on goods, as services do not employ transport. The
volumes are forecast based on the following criteria:
■ Trends manifested through historical data;
■ The impact of future step changes to the economy (such as future membership of the EU or some other
regional body).
Port Traffic
Port traffic levels act as a 'second opinion' on trade volumes. However, this check needs to be used with
caution as trade values and volumes do not always move over time in the same way.
Market Share
The market share of each mode (road, rail, inland waterway, coastal shipping) for future years is based
upon:
■ Trends in historical modal split data;
■ Evidence of government policy favouring one or more modes over others;
■ Government and or private sector investment plans in specific modes.
Sources
Sources used in transport reports include local transport ministries, officially released company results and
figures, established think tanks and institutes and donor agencies such as the World Bank and the Asian
Development Bank.

BMI - Indonesia - Freight Transport - 3Q13

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Q3 2013

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: June 2013

Business Monitor International © 2013 Business Monitor International

BMI Industry View ............................................................................................................... 7

Industry Forecast .............................................................................................................. 16

Market Overview ............................................................................................................... 26

Industry Trends And Developments ................................................................................ 30

Company Profile ................................................................................................................ 38

Regional Overview ............................................................................................................ 46

Global Industry Overview .................................................................................................. 55

© Business Monitor International Page 4

Global Oil Products Price Outlook ............................................................................................................. 55

Macroeconomic Forecast ................................................................................................ 70

Demographic Forecast ..................................................................................................... 79

© Business Monitor International Page 5

BMI Industry View

Still Expecting 6.1% GDP Growth This Year

© Business Monitor International Page 7

Key Industry Trends

KAI To Buy New Rolling Stock In PTBA Deal

Shipping To Benefit From Rising Automobile Production

Work Begins On North Kalibaru Terminal

© Business Monitor International Page 8

Key Risks To Outlook

© Business Monitor International Page 9

Indonesia Freight Transport SWOT Analysis

© Business Monitor International Page 10

© Business Monitor International Page 11

SWOT Analysis - Continued

© Business Monitor International Page 12

© Business Monitor International Page 13

SWOT Analysis - Continued

© Business Monitor International Page 14

© Business Monitor International Page 15

Transport Network Development Struggling To Keep Pace

Indonesia Real GDP Growth % Change y-o-y Average

f= BMI forecast. Source: National Statistics Agency

© Business Monitor International Page 16

Logistics Rank Low

Source: World Bank

© Business Monitor International Page 17

Road And Rail

Investment Required Further Up The Supply Chain

Problems Across The Supply Chain

Source: Global Economic Forum

© Business Monitor International Page 18

Table: Rail Freight

2010 2011 2012 2013f 2014f 2015f 2016f 2017f

e/f = BMI estimate/forecast. Source: Statistics Indonesia

© Business Monitor International Page 19

Playing A Role In The Intra-Asia Story

Table: Air Freight

2010 2011 2012 2013f 2014f 2015f 2016f 2017f

e/f = BMI estimate/forecast. Source: Statistics Indonesia

© Business Monitor International Page 20

Majors Still Enticed Despite Infrastructure Deficit

Problems At Port Level

Source: Global Economic Forum

© Business Monitor International Page 21

Table: Maritime Freight

2010 2011 2012e 2013f 2014f 2015f 2016f 2017f